respondent's answering affidavit - competition tribunal

IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA

CT CASE NO: 48/CR/Aug10

CC CASE NO: 2007Nov3338 In the matter between: THE COMPETITION COMMISSION OF SOUTH AFRICA Applicant and SASOL CHEMICAL INDUSTRIES LIMITED First Respondent SAFRIPOL (PTY) LIMITED Second Respondent _________________________________________________________________

FIRST RESPONDENT’S ANSWERING AFFIDAVIT

NON-CONFIDENTIAL VERSION _________________________________________________________________ I, the undersigned,

ADRIAAN ROLAND JANSE VAN RENSBURG

do hereby make oath and state that:

1 I am the general manager of the Polyolefins business of Sasol Polymers,

a division of Sasol Chemical Industries Limited (“SCI”). SCI is the first

respondent in this matter. I am duly authorised to represent SCI in these

proceedings, and to depose to this affidavit on its behalf.

2

2 The facts contained herein are, save where the contrary appears from

the context, within my personal knowledge and are, to the best of my

belief, both true and correct.

2.1 Some of the facts contained herein I depose to for the sake of

convenience, and they are confirmed, where applicable, by Graham

Wells (Sasol Polymers‟ general manager of planning and

technology). I attach a copy of Graham Wells‟ confirmatory affidavit

as Annexure A.

2.2 Where I make legal submissions, I rely on advice that I have received

from SCI‟s legal representatives. I believe such submissions to be

correct.

3 I have read the complaint referral of the Competition Commission (the

“Commission”), including the founding affidavit of Itumeleng Lesofe, and I

wish to respond thereto as set out below.

4 I will first respond generally to the complaint referral, and thereafter

address the specific allegations contained in the founding affidavit to the

extent necessary. For convenience I attach as Annexure B a schedule

of the abbreviations used herein.

SETTLEMENT OF SECTION 4(1)(b)(i) COMPLAINT

5 The complaint referral contains three complaints against SCI, the first two

of which concern alleged excessive pricing (of polypropylene (“PP”) and

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propylene) in contravention of section 8(a) of the Competition Act (89 of

1998) (“the Act”), and the third of which concerns alleged price-fixing of

PP prices in contravention of section 4(1)(b)(i) of the Act.

6 On 13 December 2010, the third complaint was settled in terms of a

settlement agreement between the Commission and SCI. In terms of

clause 5 of the settlement agreement, SCI admitted that the propylene

pricing formula and related provisions of the propylene supply agreement

between SCI and Safripol (Pty) Ltd (“Safripol”) (the second respondent in

this matter), dated 8 December 1994 (as amended), and its

implementation, amounted to the indirect fixing of a price or trading

condition, in contravention of section 4(1)(b)(i) of the Act.

7 The settlement agreement, upon confirmation by the Tribunal, is in full

and final settlement, between the Commission and SCI, of all

proceedings relating to section 4 and section 5(1) of the Act investigated

by the Commission under the Commission‟s case number 2007Nov3338

(clause 8.1 of the settlement agreement).

8 Given the settlement of the section 4(1)(b)(i) complaint, I have been

advised that it is not necessary for me to answer the allegations

contained in the complaint referral relating to that complaint save insofar

as they are also relevant to the remaining complaints against SCI in

terms of section 8(a) of the Act. My failure to do so should not be

4

regarded as an admission of those allegations save to the extent stated

in clause 5 of the settlement agreement.

SASOL POLYMERS’ BUSINESS

9 Sasol Polymers comprises two distinct South African operating

businesses, namely:

9.1 the Polyolefins business, which includes monomers, PP and

polyethylene (“PE”), and is the relevant business for purposes of this

matter;

9.2 the Chlor Vinyls business, which includes polyvinyl chloride (“PVC”),

vinyl chloride monomers, chlor alkali chemicals and mining reagents.

10 Sasol Polymers is in turn one of five separate divisions comprising SCI,

the other divisions being Sasol Nitro, Sasol Wax, Sasol Solvents and

Infrachem. Each of these divisions is managed as a separate business

with its own Managing Director, Divisional Board, management, financial

statements and the like.

11 SCI is a wholly-owned subsidiary of Sasol Limited, which is the holding

company of all the companies comprising the Sasol group of companies

(the “Sasol Group” or “Sasol”).

12 The Sasol Group comprises three distinct clusters, being the

International Energy cluster, the South African Energy cluster and the

Chemical cluster.

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13 The South African Energy cluster, which includes Sasol Synfuels (Pty)

Limited (“Sasol Synfuels”), mines and gasifies coal, and then converts

such gas in a Fischer Tropsch process into a range of hydrocarbons for

onward use in a range of fuels and chemicals.

14 Sasol Polymers is part of the Chemical cluster and purchases feedstock

for the production of monomers (propylene and ethylene) from Sasol

Synfuels. Sasol Polymers‟ Monomers business upgrades feedstock to

polymer-grade monomers and Sasol Polymers‟ polymers plants then

convert the monomers into polymers (PP and PE). Sasol Polymers also

operates chlorine, caustic soda, VCM/PVC and cyanide plants.

15 Sasol Polymers sells the polymers it produces to downstream plastics

converters which utilise various conversion processes to manufacture

end products for final goods manufacturers and consumers. Sasol

Polymers also sells monomers (ethylene and propylene).

PROPYLENE

16 Propylene (which, together with PP, forms the subject matter of the

present complaint referral) has a number of sources. Propylene is most

commonly sourced (as a co-product of ethylene) from the thermal

cracking of naphtha, a by-product of the conventional oil refinery process.

17 Propylene is also sourced directly from the conventional oil refinery

process. Through the use of a fluidised catalytic cracker (“FCC”),

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refinery gas is produced from crude oil and then depropanised to

produce a stream of propylene and propane. Polymer-grade propylene

is then extracted through the use of a propylene purification unit (“PPU”).

18 The process used by Sasol differs from the conventional oil refinery

process in that the feedstock gas is generated from coal using Fischer

Tropsch technology as indicated above.

19 Propylene can either be converted into petrol blend components or it can

be extracted, purified and converted into a wide range of chemical

products. The most common chemical usage of propylene is for the

production of PP. Other chemicals produced from propylene include

acrylonitrile, cumene, butyraldehyde, n-butanol, acrylic acid and a range

of acrylates.

20 Both in the case of a conventional oil refinery and of Sasol Synfuels,

propylene has a “fuel alternative value” (“FAV”) and the decision whether

or not to extract it and then purify it depends on the relative price of petrol

and polymer-grade propylene.

21 Prior to 1989, all the propylene produced by Sasol Synfuels was

converted into petrol blend components through CatPoly units. The only

local manufacturer of PP was Safripol. In the mid-1980s, Sasol decided

to enter the PP market and commenced building a PP plant and also a

PPU for the extraction of polymer-grade propylene. Sasol (at that time

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through a subsidiary, Sasol Polymers (Pty) Ltd) commenced production

of PP in 1990.

22 Sasol Synfuels currently produces approximately 900 000 tons of

propylene-containing feedstock per year, of which Sasol Polymers

extracts and upgrades approximately 620 000 tons of propylene, which is

then converted into chemicals and polymers, and the balance is

converted into petrol by Sasol Synfuels. Of Sasol Synfuels‟ total

production of propylene:

22.1 approximately 30% is directly converted into petrol by Sasol

Synfuels;

22.2 approximately 42% is used for the production of PP and, to a much

lesser extent, low density polyethylene (“LDPE”) by Sasol Polymers;

22.3 approximately 16% is used by Sasol Solvents for the production of n-

butanol, acrylic acid and a range of acrylates; and

22.4 approximately 11% is sold to Safripol for the production of PP.

23 Sales of propylene by Sasol Polymers‟ Monomers business to Safripol (a

vertical relationship) have grown steadily over the years, from 8 000 tons

in 1989-90 (when Sasol Polymers (Pty) Ltd began producing polymer-

grade propylene) to just under 98 000 tons per annum in recent years.

The terms of the current propylene supply agreement between Sasol

8

Polymers‟ Monomers business and Safripol are discussed in more

detail further below in this affidavit.

24 The other sources of propylene in South Africa are PetroSA and the four

crude oil refineries, namely Sapref, Enref, Calref, and Natref. However,

to the best of my knowledge, only Sapref and Natref currently extract

propylene for purification.

25 Before Sasol Polymers started manufacturing polymer-grade propylene,

Safripol used to import propylene through Richards Bay. However, since

Sasol Polymers began producing propylene in South Africa, Safripol has

ceased to do so. To my knowledge, the importing facility can no longer

be used for this purpose.

POLYPROPYLENE

26 PP is a thermoplastic polymer made predominantly from propylene and

used in a wide variety of applications, including (without limitation)

packaging, textiles, stationery, plastic parts, reusable containers, toys

and furniture (e.g. chairs).

27 There are three basic grades of PP. The most common form is

homopolymer, which contains only propylene in the polymer molecules,

and accounts for approximately 70% of all PP produced globally. The

other two forms of PP are copolymers, which incorporate a different

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monomer (usually ethylene) in the polymer molecules together with

propylene, namely:

27.1 impact copolymer, which has a higher impact strength than

homopolymer and is suitable for applications requiring low-

temperature performance capability or superior impact resistance;

and

27.2 random copolymer, which has physical properties similar to

homopolymer, but has high optical clarity and is accordingly used in

applications which have that property as a requirement.

28 The different grades of PP sell at different prices. Impact copolymer sells

at a higher price than homopolymer, and random copolymer in turn

usually sells at a higher price than impact copolymer.

29 PP is the fastest growing polymer both globally and in South Africa. The

global consumption of PP is expected to be approximately 48.51 million

tons in 2010. The global consumption of PP has grown at a compound

rate over a ten-year period of 6.4% per annum until the global recession

1 ATEC Data Base published by Parpinelli TECNON International Ltd (International Petroleum

and Petrochemical Consultants). Version date 3 August 2010.

10

struck in 2008, while the growth in South Africa over the comparable

period was 7.62%.

30 The largest PP consuming regions1 in the world are North East Asia

(33%), followed by Western Europe (15%), South East Asia (13%) and

the United States (“US”) (11%). Africa in total represents 3%, and South

Africa 0.5%, of the global market.

31 In 2009, 19.83 million tons of PP was traded across borders, representing

41% of total annual consumption, of which 7 million tons (approximately

15% of global production) represented extra-regional trade. Both extra-

and intra-regional deep-sea trade amounted to 11.2 million tons or 23%

of global sales.

32 PP is safe and non-hazardous and takes the form of non-volatile solid

granules or pellets that are normally packaged in 25 kg bags. These

bags are readily transported by road or in containers. No special

conditions such as refrigeration are required and PP is stable across a

wide range of temperatures. Global logistics channels, systems and

2 Sasol Polymers‟ estimates and calculations.

3 World Trade Annual Review 2009 International Trader Publications, Inc. New York.

11

facilities are readily available at competitive prices, resulting in a total

transport cost that is typically less than 10% of the value of PP4.

33 As indicated above, Sasol Polymers commenced producing PP in South

Africa in 1990. At that time, Safripol was the only domestic producer of

PP, with imports making up the difference between Safripol‟s production

and local demand. Sasol Polymers‟ sales of PP in South Africa have

grown at an annual compound growth rate of 8.2% per annum4 during

the period 1991 to 2009. Sasol Polymers‟ downstream polymers

business in respect of PP competes with Safripol and hence stands in a

horizontal relationship with Safripol.

34 The current demand for PP in South Africa is estimated at 224 000 tons,

after peaking at 237 000 tons in 2006 when it enjoyed annualised growth

of 8.3% per annum. Of these sales, Sasol Polymers‟ sales amounted to

approximately 55%.

35 In the past three years, 74 4785 tons of PP (approximately 11% of local

consumption) has been imported into South Africa, some of it by Sasol

Polymers, primarily from the Far East (Thailand, Korea and Singapore)

and Europe (Germany, France and Belgium), and customers regularly

4 Sasol Polymers‟ estimate.

5 DTI Trade Statistics.

12

threaten to import more PP during price negotiations with Sasol

Polymers.

36 The ease of importation of PP into South Africa is illustrated by the

events following the fire which damaged and resulted in a shutdown of

Sasol Polymers‟ PP plant in February 2000. Production was fully

restored only in November 2000. However, the shortfall of nearly 60 000

tons was readily, and at short notice, imported into South Africa both by

Sasol Polymers itself, its customers and traders.

37 PP production capacity in South Africa significantly exceeds local

demand, resulting in exports by both Sasol Polymers and Safripol. There

is a severe surplus of PP production capacity in the world at the moment

as a result of a downturn in global demand coinciding with aggressive

capacity growth in the Middle East based on advantaged feedstock

prices.

AD FOUNDING AFFIDAVIT

38 I now address the specific allegations contained in the Commission‟s

founding affidavit.

39 Ad paragraph 1

I have no knowledge of the allegations in this paragraph but do not

dispute them for purposes of these proceedings.

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40 Ad paragraph 2

I deny that all the facts deposed to in the founding affidavit are within the

knowledge of Mr Lesofe or that all of such allegations are true and

correct.

41 Ad paragraph 3

The allegations in this paragraph are noted. I deny that SCl has engaged

in conduct prohibited in terms of section 8(a) of the Act as alleged. As

indicated above, the complaint against SCI in terms of section 4(1)(b)(i)

of the Act has been settled in terms of a settlement agreement between

the Commission and SCI and has been admitted to the extent stated in

clause 5 of that agreement.

42 Ad paragraph 4

I have no personal knowledge of the allegations in this paragraph and put

the Commission to the proof thereof.

43 Ad paragraph 5

The allegations in this paragraph are admitted.

44 Ad paragraph 6


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45 Ad paragraph 7


46 Ad paragraph 8

The allegations in this paragraph are noted.

47 Ad paragraph 9

47.1 The allegations in this paragraph are denied.

47.2 As explained above, Sasol‟s synthetic fuels process is owned and

operated by Sasol Synfuels, not SCI. I refer to what is stated above

regarding the other sources of propylene.

47.3 SCI‟s capacity to extract and purify propylene since 1989 is set out in

the table below.

PPU name and year of installation

Nameplate capacity (tons pa)

Operating capacity today (tons pa)

PPU1 (1989) 135 000 201 000

PPU2 (1992) 125 000 125 000

PPU3 (1996) 135 000 148 000

PPU5 (2006) 455 000 455 000

Total Sasol Polymers 929 000

47.4 It should be noted that, at present, there is insufficient extractable

propylene to operate all of the above PPUs.

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48 Ad paragraph 10


48.2 The three crude oil refineries other than Sapref (namely Enref, Calref

and Natref), as well as PetroSA, are all sources of impure propylene,

although (to the best of Sasol‟s knowledge) propylene is currently

extracted for purification only at Sapref and Natref.

48.3 I refer to what is stated above regarding the use of propylene for the

production of fuel, and regarding the FAV of propylene.

48.4 I have no knowledge of Sapref‟s propylene production capacity,

which is in any event subject to a confidentiality claim by Sapref.

49 Ad paragraph 11

Save to state that propylene is also used for purposes of producing petrol

and a wide range of chemicals and polymers other than PP, the

allegations in this paragraph are admitted.

50 Ad paragraph 12

50.1 I admit that:

50.1.1 Sasol Polymers‟ monomers business sells the propylene it

produces to, inter alia, its downstream polymers business and to

Safripol for the purposes of producing PP;

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50.1.2 Sasol Polymers‟ polymers business and Safripol are the only

two producers of PP in South Africa; excluding PP imports.

50.2 Save as aforesaid, the allegations in this paragraph are denied. As

stated above, approximately:

50.2.1 30% is converted directly into petrol by Sasol Synfuels;

50.2.2 42% of Sasol Synfuels‟ total production of propylene is used for

the production of PP and, to a much lesser extent, LDPE by

Sasol Polymers;

50.2.3 16% is sold to Sasol Solvents for the production of n-butanol,

acrylic acid and a range of acrylates; and

50.2.4 11% is sold to Safripol for the production of PP.

51 Ad paragraph 13

51.1 To the best of SCI‟s knowledge, Sapref does not sell all of its

propylene production to Safripol, and it utilises a certain part thereof

within the refinery.

51.2 Save as aforesaid, I have no knowledge of the allegations in this

paragraph and put the Commission to the proof thereof.

52 Ad paragraph 14


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52.2 SCI‟s capacity to produce PP since 1990 is set out in the table

below.

Investment Nameplate capacity (tons pa)

Total PP capacity (cumulative)

PP1 (1990) 120 000 120 000

PP1 (by ca. 1994) (capacity creep)

+20 000 140 000

PP1 (1998) (new catalyst system and debottlenecking)

+80 000 220 000

PP2 (2008) (new plant) 300 000 520 000

53 Ad paragraph 15

53.1 Safripol‟s alleged PP production capacity is subject to a

confidentiality claim and I am accordingly unable to comment on that

allegation.

53.2 To the best of Sasol Polymers‟ knowledge, Safripol has the capacity

to produce approximately 110 000 tonnes of PP per year.

53.3 Save as aforesaid, I have no knowledge of the allegations in this

paragraph and put the Commission to the proof thereof.

54 Ad paragraph 16

54.1 Domestic demand for PP has not been constant since 2004.

Demand increased to approximately 237 000 tons in 2006 and

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thereafter reduced to approximately 227 000 tons in 2007 and to

approximately 224 000 tons currently.

54.2 Save as aforesaid, the allegations in this paragraph are admitted.

55 Ad paragraph 17

55.1 The allegations in this paragraph are admitted.

55.2 China is the largest importer of PP in the world and serves as a

destination for a considerable portion of global deep sea export

volumes.

55.3 The terms upon which Sasol Polymers exports PP accord with global

polymer industry norms.

56 Ad paragraph 18

56.1 It is important to explain the rationale for Project Turbo.

56.2 Sasol initiated Project Turbo in order to meet anticipated changes to

fuel specifications in South Africa. These changes required the

removal of lead, the reduction in benzene and the reduction of olefins

in petrol. Changes in the octane grades of petrol were also foreseen.

Various changes to the diesel specifications were anticipated,

notably a reduction in the sulphur level.

56.3 The oil industry was given notice that legislation would be passed

stipulating that by 1 January 2006 South African oil companies could

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no longer add lead to petrol, and that sulphur levels in diesel were

to be reduced. Under this legislation, three octane grades of

unleaded petrol, namely Research Octane Numbers (“RON”) 91, 93

and 95, could be sold in South Africa. Further, two octane grades of

Lead Replacement Petrol (“LRP”), namely LRP 93 and 95, could be

sold to vehicles that ran on leaded petrol (although it was envisaged

that LRP would ultimately be phased out).

56.4 These new specifications meant that the South African oil companies

had to alter their refining processes, incurring significant capital and

operating costs. To ensure compliance, the various oil companies

adjusted their refining processes in different ways (given the

particular characteristics of their refining operations). I understand,

for example, that the Engen refinery (Enref) opted to meet the

specifications by mainly changing its crude slate toward more

expensive, but lower sulphur, crude varieties and by reducing the

throughput rate of the refinery. Other refineries, such as Sapref,

made significant capital investment to reduce sulphur levels and

improve levels of octane in their fuel pool.

56.5 Although changes to the sulphur specification were not an issue for

Sasol, because of the already low levels of sulphur in its diesel,

Sasol Synfuels was materially affected by the other clean fuel

requirements. Traditionally in Sasol Synfuels‟ process the use of

tetraethyl lead formed a large part of the octane solution, due to the

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presence of substantial low octane streams that responded very

well to lead addition. It was thus evident to Sasol that various major

adjustments to the refining process would have to be made to meet

the new clean fuel specifications. This would require massive

investment. It was also apparent that in terms of its liquid fuel sales

such an investment would not yield a positive return. Nevertheless, it

was imperative that the clean fuel requirements were met in order to

continue sustainable operations.

56.6 In the early 2000s Sasol therefore embarked on a process of

identifying the optimal path to achieve the clean fuel specifications.

This process and the subsequent investments are referred to within

Sasol as Project Turbo. In the initial stages of this project a variety of

technology options and solutions were considered, including:

56.6.1 investing in a steam cracker to crack the problematic low octane

streams into high octane components; this would also yield

additional monomer feedstocks;

56.6.2 investing in a combination of refinery units, e.g. Platformer units,

which would make high octane components but no chemicals;

56.6.3 investing in a novel Selective Catalytic Cracker (“SCC”) to

process the low octane streams to a combination of high octane

fuel streams and additional monomers: in terms of this

technology solution a relatively small portion of the fuel pool

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(roughly 14%) would be fed through the SCC of which

approximately half would be returned to the fuel pool in the form

of high octane fuel components with the remainder being

selectively converted into ethylene and propylene feedstocks or

consumed elsewhere in the production process. Thus, up to half

of the original fuel components required consumption in other

non-fuel outlets. Investing in an SCC thus called upon Sasol

Polymers to consider its options to convert increased propylene

and ethylene volumes into polymer products. This would provide

an additional revenue stream to Project Turbo but more

importantly would make the particular technical solution (i.e. the

SCC) feasible to enhance the quality of the fuel pool by providing

an outlet for the additional ethylene and propylene feedstock. In

this context the incremental PP2 investment was conceived.

56.7 Sasol ultimately made the decision that the SCC would be the

technology used as this was expected to erode the least amount of

value from a shareholder‟s perspective. It is important to note,

however, that all of the above options, including the SCC, were

expected to result in a negative net present value (“NPV”) to Sasol,

but the use of the SCC, including PE3 and the PP2 investment, was

expected to yield a lesser negative NPV than other options

considered. Although PP2 was not a standalone project, its

contribution to Project Turbo was expected to yield an internal rate of

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return (“IRR”) above the internal investment hurdle rate but this in

itself did not justify making the total Project Turbo investment.

Accordingly, Project Turbo was ultimately designed around the use of

the SCC, which would allow Sasol Synfuels to produce 100%

unleaded petrol by 2006, at an octane mix which was expected to

increase to 40% 95 RON and 60% 93 RON and comply with the

specifications set out in legislation. The total cost of Project Turbo at

the point of its final approval was estimated to be just under R12

billion.

56.8 When considering the investment into the SCC technology, several

investment scenarios were scrutinised and evaluated by the Project

Turbo team. The scenarios were the following:

56.8.1 Minimum investment case (referred to as “Case D”)

(a) This scenario involved only the remediation of fuel to meet

the clean fuel specifications (with the minimum investment

required). There would be no major investments in other

chemical stream opportunities. This scenario entailed an

investment in an SCC, primarily to process alpha-olefin off-

cuts. This SCC was expected to result in additional

propylene and ethylene feedstocks which were seen to

potentially compromise the quality of the fuel pool and could

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ultimately result in the partial flaring of certain of these

streams.

(b) It was anticipated that additional ethylene production would

be accommodated through the up-rating of Sasol Polymer‟s

linear low density polyethylene (“LLDPE”) plant, cutting

back on all discretionary ethylene production, using

ethylene (rather than propylene) for benzene alkylation and

flaring of the residual product. Key product volumes for

Case D are shown below.

Tons/a Ethylene Propylene from PPUs

Fuels (m3/a)

Production 596 000 493 000

Consumption 522 000 493 000

Stochastic losses and flaring

74 000

Fuels (m3/a) 6 152 000

(c) In terms of this investment scenario, the additional

propylene streams would be converted into fuel

components and for blending into the fuel pool. Since these

fuel components are characterised by low levels of octane,

significant and costly additional processing would have

been required so as not to compromise the quality of the

overall fuel pool.

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(d) Without the use of lead in the refining process, and the

presence of the additional low-octane propylene streams, it

was difficult for Sasol Synfuels to obtain the desired levels

of octane in its fuel pool. This required that various refining

units (particularly the platinum reformers) be run at their

operating limits. As such the fuel pool quality under this

scenario was particularly sensitive, with any deviation from

optimal performance of refinery units and/or the presence of

excess propylene molecules putting extreme pressure on

Sasol‟s ability to achieve a viable fuel pool in terms of the

clean fuel specifications.

(e) The capital required for this case was anticipated to be

approximately R4.785 billion and it was expected to return

an NPV of a negative R3.902 billion.

56.8.2 PE investment case (referred to as “Case F”)

(a) In this scenario, the assumed size of the SCC was

increased by approximately 17% above that required to

meet the clean fuel specifications so as to generate

additional ethylene feedstock to enable economies of scale

in a downstream PE plant. This option thus included the

building of a new world-scale LDPE plant (known as PE3)

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to make use of this additional ethylene feedstock. Key

product volumes for Case F are shown below.

Tons/a Ethylene Propylene from PPUs

Fuels (m3/a)

Production 674 000 495 000


Stochastic losses

2 000

Fuels (m3/a) 6 002 000

(b) The larger SCC also resulted in the production of additional

propylene feedstock. In the Project Turbo mass balance for

Case F the additional propylene feedstock would be

converted into fuel components in the CatPoly units. But as

I have previously explained, this would lead to significant

additional processing costs given the low levels of octane of

the components produced from the propylene streams and

this was expected to put severe pressure on the overall

quality of the fuel pool.

(c) The additional capital required for this case (relative to

Case D) was anticipated to be approximately R3.564 billion

(including the additional spend on enlarging the SCC). The

NPV on the incremental investment of R3.564 billion was

expected to be R1.06 billion, with an IRR of some 20.7%.

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(d) Overall, the entire investment under this scenario

(including the full Sasol Synfuels investment in clean fuels)

was anticipated to cost some R8.349 billion and yield an

NPV of a negative R2.841 billion i.e. an improvement of

R1.061 billion over the minimum investment case NPV.

56.8.3 PP investment case (referred to as “Case G”).

(a) This scenario entailed the investment in the same sized

SCC as for Case F to meet the clean fuels requirements; to

maximise the availability of ethylene feedstocks and to

additionally invest in the PP value chain.

Tons/a Ethylene Propylene via PPUs

Fuels (m3/a)

Production 674 000 810 000


Stochastic losses

2 000

Fuels (m3/a) 5 590 000

(b) Under this investment scenario it was envisaged that the

additional propylene streams emanating from the SCC

process would not be channelled back into the fuel pool but

would rather be diverted to produce PP. As a result, slightly

less fuel was expected to be produced under this

investment case compared to the previous scenario. Under

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the other scenarios it was envisaged that the “lost” fuel

(which in Case G was now to be diverted to PP production)

would have been exported (at least for the first eight years)

given that South Africa was, at that point in time, expected

to be long in petrol supply until FY2015.

(c) To utilise the additional propylene feedstock, this

investment scenario contemplated additional investment in

the PP value chain including: (i) a new polymer-grade

propylene purification column (known as PPU5) to

maximise propylene extraction from Sasol Synfuels and (ii)

the building of a world-scale PP plant (known as PP2).

(d) It was anticipated that additional PP volumes would need to

be exported (thereby fetching export prices) until FY2015,

by which time local demand was expected to have grown

sufficiently to absorb part of this new production capacity.

(e) The downstream investments in PP required a relatively

small amount of additional polymer-grade ethylene, and as

a result this scenario also posited that the size of the PE3

plant would be marginally reduced relative to Case F (i.e. by

some 4%).

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(f) This option also had the added appeal of providing an

outlet for additional low-octane propylene feedstock which

aided Sasol‟s ability to achieve the desired fuel pool quality.

(g) The additional capital required for this case (relative to

Case F) was anticipated to be approximately R3.598 billion

at final approval in November 2003. In effect, this capital

related only to the investments downstream of Sasol

Synfuels because no further investments were required at

Sasol Synfuels in this scenario (relative to Case F). This

incremental investment was anticipated to give an NPV of

some R1.197 billion and an IRR of some 21.6%. This NPV

calculation also took into account changes in anticipated

cash flows associated with the expected impact on liquid

fuel volumes, as well as the additional PP export sales.

(h) Nevertheless, overall the entire investment under this

scenario (i.e. including the full Synfuels investment in clean

fuels and the polyethylene investment) was anticipated to

cost, at final approval, some R11.947 billion and yield an

NPV of a negative R1.643 billion.

56.9 Ultimately, the third investment option (investment Case G) was

chosen given that it promised an attractive return for Sasol as a

whole. It should, however, be noted that this entire investment

29

option, although the most appealing, was still expected to result in

a negative NPV for Sasol. Without the new fuel specifications, there

was no financial justification for Sasol to make the Project Turbo

investment or to expand PP production.

56.10 The allegations in paragraph 18 relating to Sasol Polymers‟ capacity

have been addressed above.

56.11 The assumptions around future macroeconomics and oil prices as

well as high growth in PP demand and low growth in fuel demand

were made at a time of positive global outlook. Assumptions of high

GDP growth, higher diesel demand than petrol, low oil prices, a weak

R/$ exchange rate and normal capital equipment and construction

pricing set the scene for positive project economics. The following

table compares the Project Turbo assumptions and the current long-

term forecast:

Assumptions Project Turbo

(averaged annual values over

period July 2005 to June 2020)

Validity 2003

Today

(single year value)

Sasol’s long term view in 2010

(averaged annual values over

period July 2005 to June 2020)

R/US$ exchange rate

R13.58 R7.00 R9.32

Brent crude oil $21 $78 $92

SA GDP 3.5% 1.4% 3.5%

SA CPI 5% 3.8% 5%

US CPI 2.5% 1.1% 2.5%

30

Hurdle rate (1.3*WACC)

19.125% 17.225% 17.225%

PP Price (CFR Hong Kong)

$770 $1275 $1543

Ratio of PP price to oil

36.6 16.3 16.8

SA PP consumption in 2010

310 000 tons 224 000 tons

Petrol supply/ demand from 2005 to 2014

SA production in excess

SA production in deficit

57 Ad paragraph 19

57.1 As noted in paragraph 28 above, the different grades of PP sell at

different prices. Impact copolymer sells at a higher price than

homopolymer, and random copolymer in turn usually sells at a higher

price than impact copolymer. The largest price difference between

random copolymer PP and raffia grades can be up to $200/t (15%).

57.2 Sasol Polymers naturally needs to earn a return on its propylene and

PP investments. Sasol Polymers is, however, not free to unilaterally

set prices at a level that achieves this. Competition with Safripol and

the relative ease with which PP is imported into South Africa

constrain the price which Sasol Polymers can charge. Any sustained

pricing above the price at which PP can be imported will result in a

significant shift to imported PP. This constraint results in prices

31

which generally do not adequately reward investment in South

Africa, as I shall explain later.

57.3 In order to remain competitive, Sasol Polymers‟ price-setting

procedure takes into account a number of competitive forces, inter

alia, competition from imports, competitive offers from Safripol, price

movements in substitute products, the status of demand in the South

African economy at the time etc. Sasol Polymers monitors export PP

prices from the US, Europe, and the Far East (using Platts, ICIS

Pricing, CMAI, etc) and then selects the lowest of these for its PP

price calculations. In the past ten years, the lowest priced imports

and the threat of imports have mostly been from the Far East, South

Korea in particular. Using export prices from South Korea sets a low

base for Sasol Polymers‟ price calculations, because it is generally

known that these are marginal prices that often do not cover full

costs of production in that country.

57.4 Sasol Polymers calculates, from each of the three export sources,

what the delivered, duty-paid cost would be (in South African Rands)

to a coastal and inland converter in South Africa. It chooses the

lowest price source as a reference point for pricing and averages the

weekly prices to calculate a monthly average delivered price at the

coast and inland. It further weights the inland and coastal prices by

the volumes sold in each region to calculate a single monthly

indicative delivered price for PP in South Africa.

32

57.5 The prices quoted and used as described above are for PP raffia

grade. Typical margins are added to get indicative prices for other

homopolymer grades, impact copolymers, random copolymers and

specialised grades. A two-month lag between export prices and

South African domestic prices is assumed, based on a typical import

lead time of 6-8 weeks, although recently certain lead times have

been cut to days as importers have established on-shore

stockholding.

57.6 Sasol Polymers' pricing is, however, not mechanistically driven by

IPP. IPP is only one of the factors taken into account when

determining the actual price to customers. In most instances,

customers are aware of global price trends and indicative price offers

from competitive international suppliers in South Africa, and these

indications tend to drive Sasol Polymers' pricing considerations.

Competitive offers from Safripol and distributors of imported PP, as

well as other factors such as price movements in substitute products,

are considered.

57.7 We note the allegation that Sasol Polymers‟ prices for PP are up to

32% higher than export prices. The more appropriate measure

would be to compare the respective average weighted pricing levels,

given (among other considerations) timing differences of settling

deals and shipping product. On average, between January 2000 and

December 2009, the average ex-works netback (CFR price less

33

freight less port charges less inland delivery cost) for domestic

sales was only 16.3% higher, on a weighted basis, than the average

Sasol Polymers‟ ex-works export netback. It must further be borne in

mind that approximately 27% of all PP exports were supplied into

China through a Chinese distributor to whom a lower price than usual

was offered in return for a take-or-pay volume contract. Normalising

this position would reduce the 16.3% even further.

58 Ad paragraph 20

Sasol Polymers generally agrees prices with customers on the basis that

the product is delivered to a customer‟s site (i.e. the price includes the

delivery cost). Nevertheless, some customers prefer to collect their own

product from the Sasol Polymers‟ production facilities or regional

warehouses. In such instances, the customers are reimbursed with the

amounts of the costs which Sasol Polymers would incur in delivering the

product to the customers' sites.

59 Ad paragraph 21

59.1 The quarterly average historical PP prices of Sasol Polymers and

Safripol have differed throughout the relevant period, mostly by about

5% but sometimes by over 10%.

59.2 Whilst the parties attempt to differentiate their product offerings on

the basis of factors such as quality, delivery time, and reliability of

34

supply and inventory, the commoditised nature of PP means that

their PP prices for comparable products would not be expected to be

significantly different. In fact, this is entirely consistent with a

competitive outcome for similar products. I deny that this is the result

of any agreement or concerted practice between Sasol Polymers and

Safripol

59.3 I point out in this regard that there is a very considerable degree of

switching by customers between Sasol Polymers and Safripol on an

ongoing basis.

60 Ad paragraph 22

The allegations in this paragraph are admitted. The contents of the

supply agreement, and the circumstances surrounding its conclusion, are

addressed in more detail below in this affidavit insofar as they are

relevant to the excessive pricing complaints against SCI.

61 Ad paragraph 23

61.1 The allegations in this paragraph are admitted insofar as they

accurately reflect the express terms of the supply agreement.

61.2 Further details regarding origins and nature of the pricing formula

contained in the supply agreement, which was introduced at the

instance of Safripol and its shareholders in order to protect the gross

35

margins of Safripol, are set out below in this affidavit insofar as

they are relevant to the excessive pricing complaints against SCI.

62 Ad paragraph 24

62.1 Save to admit that, in terms of the supply agreement, a higher price

is paid for quantities above 55 000 tons but only up to 100 000 tons

per annum, the allegations in this paragraph are denied.

62.2 The increased price for volumes above 55 000 tons is directly related

to the higher costs associated with the production of the additional

volumes, including a higher feedstock price from Sasol Synfuels,

higher purification and operating costs due to the dilute nature of the

relevant condensate stream, and necessary investment in new plant

and equipment (PPU3).

62.3 I point out further that the increased price paid by Safripol for

volumes above 55 000 tons is also applicable to Sasol Polymers for

its additional volumes arising from the new investment (PPU3) and

accordingly is non-discriminatory.

63 Ad paragraph 25

63.1 The allegations in this paragraph are admitted insofar as they

accurately reflect the express terms of the supply agreement.

36

63.2 The pricing formula for propylene to be used for the manufacture

of PP for export is explained in more detail below, as is the reason

for the differential between export and domestic prices.

64 Ad paragraph 26

64.1 Save to admit that Sasol Polymers produces more propylene than is

required for the production and sale of PP domestically, the

allegations in this paragraph are denied.

64.2 As explained more fully below, the formula contained in the supply

agreement does not incentivise Sasol Polymers and Safripol to

increase the prices they charge for local sales of polypropylene to

IPP levels, nor does Sasol Polymers in fact charge IPP prices for

propylene. On average, the price paid by Safripol for propylene is

approximately 31% lower than IPP from the US Gulf Coast (a region

which has surplus propylene product).

64.3 The Commission‟s theory that the price formula in the supply

agreement incentivised the parties to follow each other‟s price

increases also overlooks the fact that, prior to the conclusion of the

supply agreement in 1994, prices for domestically produced PP were

already at IPP levels but were constrained from rising higher by

imports.

37

65 Ad paragraph 27

65.1 The allegations in this paragraph are noted.

65.2 For the reasons set out elsewhere in this affidavit, I deny that SCI‟s

conduct constitutes a contravention of section 8(a) of the Act as

alleged. As indicated above, the complaint against SCI in terms of

section 4(1)(b)(i) of the Act has been settled in terms of a settlement

agreement between the Commission and SCI and has been admitted

to the extent stated in clause 5 of that agreement.

66 Ad paragraph 28


67 Ad paragraph 29

67.1 Save to admit that there are a number of different polymers that are

produced from propylene and that PP is a distinct product market,

the allegations in this paragraph are denied.

67.2 Whilst different polymers each have particular characteristics and

applications, there are numerous applications for which PP can be

substituted by different polymers (and other materials), as reflected in

the following table.

38

Application Sector Polymer Alternatives Other Material Alternatives

Non-wovens metallocene PP mini-random PP

natural fibres paper

Flooring nylon polyester

ceramic wood wool wood laminates

Domesticware and toys Polythene, PVC ABS / Polystyrene / HIPS

glass metal

Pipe HDPE PVC

concrete metal

Food containers HDPE, PET, PS Clear Impact-random PP (Clyrell)

metal glass paper

Cosmetic & Pharmaceutical Containers

PET, ABS, PS, HDPE, PVC

glass paper

Sheet PVC HDPE

Cardboard

Buckets HDPE PET

metal / tin

Automotive Nylon, ABS TPO (thermoplastic polyolefins)

Metal

Caps and Closures HDPE Metal

Fibres and Strapping PE nylon

natural fibres

Appliances ABS Metal

Crates & Boxes HDPE wood cardboard

BOPP BOPET Paper

Chairs and Furniture HDPE HIPS wood-plastics composites

cast iron wood concrete metal

Industrial & Custom Moulding

HDPE, PS, ABS, HIPS PET, nylon

glass metal

Film PE Paper

Woven Cloth HDPE Paper

39

67.3 Approximately 70%6 of the growth in PP consumption globally was

achieved as a result of substitution for other plastics, in particular

HDPE, polystyrene and engineering plastics. For example HDPE

and PP are both used in the manufacture of large injection-moulded

articles such as pallets, crates, movable bins and buckets. Similarly,

PP has made significant gains relative to nylon and other materials in

the carpet manufacturing industry.

67.4 Other materials such as paper, steel and glass also compete with PP

in a variety of applications. For example, in the packaging of paint,

PP containers can be used interchangeably with metal containers by

paint manufacturers.

68 Ad paragraph 30

Save to state that different monomers are used in the production of

different kinds of PP, the allegations in paragraph 30 are admitted.

69 Ad paragraph 31.1


6 Family Conference of licencees with Novolen Technical Holdings C.V., a joint venture of ABB

and Equistar, the licensor of PP1 technology.

40

69.2 SCI contends that, as the Commission has previously indicated,

the market for the sale of PP is global.

69.3 I point out in this regard that when international PP prices started

dropping in May 2008 as a result of the global recession, Sasol

Polymers was forced by imports and the threat thereof to lower its

domestic PP prices to levels at which not only Sasol Polymers‟ PP

business but its business as a whole suffered significant financial

losses.

69.4 I further point out that PE, a polymer which is packed and transported

in a similar way to PP, and which has a similar price to PP, is

imported into South Africa on a large scale. In 2009 over 90 000

tons of LDPE and LLDPE were imported. This is estimated at about

30% of the total consumption.

69.5 I also refer in this regard to what is stated in paragraphs 29 to 36

above, and to what is stated below, in this regard.



70.2 It is not only possible to import PP into South Africa but PP is in fact

imported in significant quantities. As indicated above, over the past

three years some 11% of the local consumption of PP has been

imported into South Africa.

41

70.3 I specifically deny that the costs of importing PP into South Africa

are prohibitively high having regard to the overall cost of PP. The

total transport cost typically ranges from 8% to 12% of the landed

value of PP.

70.4 I again refer to what is stated in paragraphs 29 to 36 above.


71.1 Save to admit that during the period 1994 to August 2009 the ad

valorem duty on polymers was 10% on FOB prices, the allegations in

this paragraph are denied.

71.2 In terms of the South Africa/European Union Trade Development Co-

Operation Agreement, which was implemented on 1 May 2004,

duties on polymer imports from the European Union have been

gradually reduced to 2.5% in 2010 and are to be eliminated in 20127.

71.3 On 14 August 2009 duties on polymers from all other countries were

reduced to 3.8% and further reduced to 2.5% on 1 January 2010. On

1 January 2011 polymer duties will be further reduced to 1.3% and

on 1 January 2012 they will be eliminated.

7 ITAC Report no. 282 dated 08/10/2008.

42

71.4 South Africa‟s tariffs on polymer imports are now amongst the

lowest in the world.

71.5 I furthermore deny that the customs duty on PP imports in any way

indicates that imported PP is not an effective substitute for PP

manufactured in South Africa.


72.1 Save to admit that there are imports of PP into South Africa, the


72.2 As set out above, imports account for approximately 10% of domestic

consumption of PP and have done so for the past three years.

72.3 I also deny that such imports are made up “almost entirely of grades

of polypropylene not produced by Sasol or Safripol”. SCI estimates

that approximately 80%8 of the PP imports into South Africa in the

past three years relate to grades that are or can be produced in

South Africa.




43

73.2 As indicated above, SCI contends that the PP market is an

international one.

74 Ad paragraph 32

Save to state that prior to the commencement of production at Sasol‟s

PP business, Safripol used to import part of its propylene requirements

into South Africa through Richards Bay, the allegations in this paragraph

are not disputed for purposes of this matter.

75 Ad paragraph 33


76 Ad paragraphs 34-36

76.1 I have dealt with these allegations above. I deny that Sasol

Polymers is either dominant or a quasi monopoly in a South African

market for PP.

76.2 As the Commission stated in its 14 December 2003 newsletter: “In

the cases of the aggregate polymers market, as well as PP, the

markets are considered global, implying that Sasol Polymers is not

dominant”.

76.3 As regards the Commission's contention that there is a domestic

market, and that such market is uncontested and incontestable, I

44

repeat my response to these allegations contained in

paragraphs 29 to 36 and paragraphs 57, 64, 69 and 70 above.


77.1 The allegations in these paragraphs are denied.

77.2 To the best of my knowledge, Safripol is not capacity-constrained in

the sense that it cannot offer additional volumes of PP to South

African customers, as the Commission appears to suggest. Safripol

exports product. Its exports of PP could be diverted and offered to

local customers. To the best of Sasol Polymers‟ knowledge, it also

does not fully utilise the available propylene from Sapref.

77.3 As noted above, Sasol Polymers and Safripol compete (along with

importers) for South African customers. Normal competitive forces

are in play, as any material price reduction at a customer account by

either player will invoke a reaction from the other. Sasol Polymers'

PP prices are a result of negotiation with customers. As noted

above, most customers‟ purchasing behaviours are easily swayed by

the respective price offerings from other sources, as is evident in the

highly erratic monthly share of customers‟ sales percentages. It is a

widespread tactic amongst PP customers in South Africa to play

Sasol Polymers and Safripol off against each other (and to threaten

to purchase imported PP) and then to buy from the one who offers

the lowest price and/or better terms. The Commission‟s allegation

45

that Safripol‟s prices do not currently constrain those of Sasol

Polymers is, therefore, denied.

78 Ad paragraph 39

78.1 Safripol is not entirely dependent on Sasol Polymers for additional

volumes of propylene. All indications are that there is unutilised

capacity available at Sapref. Furthermore, additional propylene

could be made available at the coastal refineries, Enref and Calref,

as well as at PetroSA, which could be extracted and purified.

78.2 Safripol has not asked Sasol Polymers for any additional allocation of

propylene during the last six years. It has restricted its forward-

looking requirements to the 100 000 tons per annum contractual

volume. It should be noted that Safripol has not utilised its full

contractual volume allotment of 100 000 tons in any year since 2003.

Nevertheless, Safripol is from time to time offered, and does take on

a short-term basis, additional volumes of propylene when Sasol

Polymers experiences operating difficulties on its PP units.

78.3 Accordingly, the allegations in paragraph 39 are denied.

79 Ad paragraph 40

The reason that an additional tranche of propylene is more expensive is

explained above. I reiterate that Safripol exports PP, which could in

principle be made available to South African customers. In any event,

46

Sasol Polymers' prices are constrained by imports, by Safripol, and by

the ability of the downstream South African industry to switch to other

polymers or to substitute products.

80 Ad paragraph 41

I deny that the supply agreement disincentivises Safripol to cut its PP

prices. On the contrary, any price reduction by Safripol is subsidised via

the formula, a feature few other producers enjoy in other parts of the

world.

81 Ad paragraph 42

I am advised that pricing with reference to IPP does not indicate market

power. I am advised that demonstrating market power requires a

showing that prices have been raised substantially above the competitive

level. Export prices, or special export incentives for that matter, are not

reflective of a competitive price.

82 Ad paragraph 43

82.1 The allegations are denied. Sasol Polymers‟ entry into the market

resulted in a substantial benefit to the South African polymer

converting industry. Prior to 1990 Safripol was the only local supplier

of PP, accounting for approximately 40 000 tons per annum. The

substantial rate of growth of local PP sales post-1990 can be

ascribed primarily to Sasol Polymers. Not only did Sasol Polymers

47

introduce a further supply of PP to a stagnant market, but the

introduction of new grades as well as the benefits of offering

technical support and marketing and product development expertise

to South African customers clearly invigorated the plastics converting

industry. Over the period 1990 to the present, PP consumption has

grown at 2.5 times GDP9 in South Africa, exceeding growth

multipliers achieved in the developed world. Through Sasol

Polymers‟ product development and customer support initiatives,

above-average market growth of the domestic converting industry

has been achieved.

82.2 In these circumstances, the notion that Sasol Polymers has restricted

supply or created an artificial scarcity for South African customers of

PP is far-fetched. Sasol Polymers has always made sure that the

domestic customers are fully supplied prior to any product being

exported. PP demand is inelastic and a reduction in price will not

lead to a material increase in production. I address this further

below. The lack of uptake of Sasol Polymers‟ export incentives even

at relatively high rebates supports this notion.


48


83.1 Because Sasol Polymers exports PP, it actively encourages its

customers to convert this PP into value-added intermediate or

finished goods and to export such converted goods, rather than

Sasol Polymers exporting PP polymer itself. Sasol Polymers offers

an incentive to all customers who wish to export finished products

fabricated from Sasol PP. This is aimed at improving the scale and

efficiency of these converters, thus making them more competitive

domestically and in exports, and thereby stimulating growth and

employment.

83.2 The incentive is offered in the form of a rebate on the selling price of

PP, which is credited to a customer upon receipt of a formal claim.

The claim must be accompanied by documentary proof that the

products manufactured from PP purchased from Sasol Polymers

were directly exported by the customer. Claims must reach Sasol

Polymers within a period of three months after the date the goods are

exported, though this is not strictly enforced. The criteria which

exporters need to fulfil are set out in the Customer Export Incentive

Policy (“the CEIP”), attached as Annexure C.

83.3 In terms of the CEIP, price rebates are communicated to customers

in advance (prior to exporting), as part of the monthly price offer.

The intention is to enable the customer enough time to evaluate the

49

viability of exporting based on the rebated price. Approximately

12% of the annual PP volumes supplied by Sasol Polymers to South

African customers are subject to an export rebate. The incentive

scheme does not set a maximum or a minimum volume of product

which any customer can purchase.

83.4 I deny that Sasol Polymers requires documentation to support a

claim under the CEIP, or pays the rebate “only in arrears”, in order to

prevent the lower prices it offers from affecting its IPP-based prices

as the Commission alleges in paragraph 46 of the complaint referral.

Rather, Sasol Polymers merely seeks to ensure that a claim is not

being made against it in circumstances where the PP may in fact

have been sourced from Safripol or an importer, or where the PP is

not being used for the purpose for which the rebate is offered. There

is nothing untoward about this.

83.5 The allegations in paragraph 47 are admitted. The table below

shows detail of export support provided.

50

Period 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10

Export rebate volumes (tons) 16 402 12 563 15 923 12 090 15 126 13 195 14 194 13 530

Export rebate annual support (Rand million) 17.1 14.1 18.8 16.5 31.3 32.6 29.4 16.7

Export rebate average (R/t) 1,042 1,122 1,179 1,363 2,069 2,473 2,072 1,234

Export rebate R/t as % of Average Price achieved 15% 17% 15% 16% 19% 21% 16% 11%

Total Sasol Polymers PP local sales volumes (tons) 112 126 118 288 114 735 119 684 122 319 116 458 110 096 125 230

Export rebate volumes as % of Sasol Polymers PP local sales 15% 11% 14% 10% 12% 11% 13% 11%

83.6 Even with export support at a rebate of 20% over an extended

period, there was minimal impact on customer up-take of PP

volumes for export.

83.7 I deny again that the export rebates create an artificial shortage.

84 Ad paragraph 48

84.1 The allegation is denied. Sasol Polymers sells exports at the price

needed to compete at the destination. The price basis is most

commonly CFR or CIF for deep-sea exports, but other terms are also

51

used. It is the industry norm worldwide for export sales to be

made on that basis.

84.2 The advantage of using CFR/CIF (delivered to destination port) is

that the exporter is able to handle the outbound logistics, relevant

documentation, and all the associated planning to target the sailing of

a certain vessel. A buyer in a foreign country is generally unable, or

even unwilling, to plan and execute an export order from the

producer‟s warehouse to the port in a foreign country, given the

unique conditions in each country. Factors such as container

availability, stack dates, sailing times and frequencies, inspection

requirements, and so forth, are more easily controlled from within the

exporting country by the producer/supplier than from overseas.

These practical considerations, which bring about efficiency in the

execution of an export order, are the reason that Sasol‟s exports are

based on these delivery terms.


85.1 Barriers to entry into PP manufacturing in South Africa are high, as in

other countries. There are, however, no or at least very low barriers

to importing PP.

85.2 As noted above, global logistics channels, systems and facilities are

readily available at competitive prices. The costs of importing PP

into South Africa are not prohibitively high, having regard to the

52

overall cost of PP. The total transport cost typically ranges from

8% to 12% (on average less than 10%) of the landed value of PP to

which would also need to be added the customs duty (if any)

applicable. It is, therefore, not necessary for a new entrant to build a

PP plant in this country in order to compete for South African

customers.

85.3 It is clear from the current status of the overall polymer industry that

there are few barriers for importers of polymer product to achieve

market penetration. Major players such as ExxonMobil and Sabic

(on a global basis, occupying respectively the second and third

largest PP global manufacturing positions in 2009 according to data

in a 2009 CMAI report10) have set up warehousing and sales

infrastructure in South Africa and have established logistics channels

in place to service domestic customers. This will enable them to

match lead times of South African producers. There are numerous

smaller importers and traders that have established markets and

service offerings locally as shown in the table below. The advantage

that these importers have is that, because they are able to offer a far

broader range of polymer products to the South African market, their

costs can be amortized over this volume rather than merely over

10 CMAI Chemical Company Analysis on Sasol dated February 2010.

53

much smaller PP volumes alone. In addition, some of the bigger

customers import product directly. Most notable in PP importing

activity in South Africa are the following:

Importer / Trader List of Polymer Products traded

ExxonMobil LDPE, LLDPE, mPE, PP

Sabic LDPE, LLDPE, HDPE, PP

MBT South Africa HDPE, LDPE, LLDPE, PVC, PP, PET, PS, ABS

Protea Polymers HDPE, LDPE, LLDPE, PP

Plastomark Modified PP, ABS, PC, SAN, GPPS, HIPS, LLDPE, POM, PBT, UHMWPE, PET, PPS, PA, PVC, LDPE, PMMA, EVA

Samchem LLDPE, LDPE, PP, PA6, PA66, PC, PS, PVC, POM, HIPS, PEEK

Advance Polymers LDPE, LLDPE, HDPE, PVC, filled PP, PA, ABS, PMMA, PC, PBT, TPE, POM

Rawmac PS, EPS, HIPS, ABS, SAN, PVC, POM, PA, PBT, PET, PC, HDPE, LDPE, EVA, PP

West African Group HDPE, LDPE, LLDPE, Metallocene, PP, HIPS, GPPS, PIB, EVA, others

85.4 South Africa is certainly not insulated from imports.


86.1 International data indicates that most new entrants to the polymer

industry position their production facilities close to low-cost and

abundant feedstock sources (e.g. in the Middle East) or close to

large and developing polymer markets (e.g. in China or India). Sasol

Polymers does not have sufficient spare propylene capacity to supply

a new local producer. Indeed, Sasol Polymers currently does not

54

have enough propylene available from internal sources to run its

own PP plants at design capacity.

86.2 For these reasons, and those given above, it is unlikely that a new

entrant would invest in a new PP plant in South Africa (save to say

that there could be additional propylene in coastal refineries for

modest expansion of capacity).

86.3 The remaining allegations in this paragraph are denied.

87 Ad paragraph 54

87.1 The allegation that Sasol Polymers has a dominant position in a

domestic market for PP is not admitted. The allegation that its

position in South Africa is not due to innovation or risk-taking, but

rather to past exclusive or special rights, and in particular a history of

state support, is denied.

87.2 While Government support was a factor in the establishment of Sasol

many years ago, State investment was fully repaid before Sasol

commenced producing PP. Sasol has been a privately owned and

listed company for 30 years. During this time, shareholders in the

company have made significant investments entailing technological,

market and political risk that has contributed to large efficiency

improvements. Government support subsequent to the company‟s

privatisation, mostly in the form of tariff protection, has been relatively

55

modest and in line with protection provided to many industries in

South Africa.


88.1 Save to the extent that the Commission has accurately summarised

the test for economic value in paragraph 55, all of the allegations in

these paragraphs are denied.

88.2 I am advised that the Act prohibits excessive pricing by a dominant

firm, where an excessive price is defined as “a price for a good or

service which bears no reasonable relation to the economic value of

that good or service”.

88.3 I am also advised that the Competition Appeal Court ("the CAC") has

held that the legislature must have intended the “economic value” of

a product to be “the notional price of the good or service under

assumed conditions of long-run competitive equilibrium.” The CAC

held that the price under conditions of long-run competitive

equilibrium, and hence “economic value”, would in effect equal the

total cost of providing the product in a competitive market. It

stressed, however, that the total cost would include a “normal rate of

return” to providers of capital, without which the industry would not be

sustainable in the long run. I am advised that it follows that an

empirical enquiry into the costs actually incurred, and the returns on

56

assets required by debt and equity holders, is at the heart of the

determination of economic value.

88.4 The CAC also pointed out that the calculation of the economic value

of a good or service is not necessarily “derived from circumstances

peculiar to the particular firm”. It held that while the allegedly

dominant firm‟s costs may form an important evidential ingredient in

such an inquiry, they will not in and of themselves provide a measure

for arriving at economic value unless they can be shown to

correspond to the competitive norm. It follows, I am advised, that

when determining economic value, “any special advantage”

(including cost savings resulting from a subsidised loan or lower than

market rental or other advantage), which serves to reduce the

particular firm‟s costs below “the notional competitive norm”) ought to

be disregarded, while conversely the effects of material inefficiency

(if any) may require adjustment.

88.5 In summary, economic value is reflected by the long run competitive

outcome of a market which allows for a firm to cover costs and earn

a reasonable return on capital. Therefore, the primary test for

excessive pricing is to show that prices are unreasonably above unit

costs plus a reasonable return. An alternative application of the test

is to show that revenue derived does not unreasonably exceed total

costs plus a reasonable return. On both these bases Sasol Polymers‟

prices have not exceeded economic value.

57

88.6 This analysis can be carried out by comparing Sasol‟s returns on

capital to Sasol‟s weighted average cost of capital (“WACC”). WACC

is a good proxy for a normal profit or reasonable return.

88.7 I am advised that when calculating economic returns for the

purposes of assessing the excessiveness of prices, the CAC has

recognised long-run competitive equilibrium as a yardstick with its

implication of the appropriate capital cost of assets, and not the

historical cost, particularly for certain assets that have been acquired

many years earlier (as is the case with Sasol Polymers‟ assets).

88.8 Replacement cost represents the level of investment that a new

entrant would incur and which allows the industry to grow and renew

where competitive feedstock is available. Firms would be reluctant to

enter a market if returns derived over a period of time are insufficient

to cover the replacement costs of assets. This is supported by the

Commission‟s own complaint referral, which recognises in

paragraphs 49 to 51 that the high cost of establishing a production

facility is a barrier to entry. The fact that entry has not occurred may

suggest that prices are insufficient to allow an entrant to earn a

suitable reward for the investment risk where economies of scale

dictate a plant size which necessitates exports.

88.9 In order to apply correctly the core test on excessive pricing as

outlined by the CAC, economic returns for Sasol‟s PP business were

58

calculated assuming five different business combinations (refer to

the table set out below):

88.9.1 a separate Sasol PP business (PP1 and PP2) that includes in its

operating costs the actual price of propylene from Sasol‟s

propylene business as per the supply agreement (“Standalone

PP”);

88.9.2 a vertically integrated Sasol business (PPUs, PP1 and PP2) that

eliminates inter-company payments for propylene but includes

the underlying costs of producing propylene and PP

(“Integrated”);

88.9.3 a vertically integrated Sasol business (as per ”Integrated”)

excluding the newly constructed PP2 plant (“Integrated PP1”);

88.9.4 a vertically integrated Sasol business (as per ”Integrated PP1”)

but that assumes all volumes were sold at prevailing export

prices (“Integrated PP1 export prices”);

88.9.5 a vertically integrated Sasol business (as per ”Integrated PP1”)

but that assumes all volumes were sold at prevailing domestic

prices (“Integrated PP1 domestic prices”).

88.10 In keeping with the approach outlined by the CAC, adjustments were

made to the cost base in the above calculations, which eliminated the

special cost advantages derived from having access to low cost

59

propylene feedstock, and also eliminated any possible

inefficiencies. This was done to estimate notional competitive

propylene and PP operating costs. Fifteen years of revenues and

cost (i.e. all the historical financial data available) were analysed

when calculating returns in order to ensure that the full economic

cycle was taken into account.

88.11 The depreciated replacement cost of assets for each year of the

analysis was estimated with reference to book values of individual

propylene and PP assets adjusted for movements to the construction

price index over the period. This index provides a reasonable proxy

for the changes in the underlying value of the PP assets.

88.12 The South African PP environment is such that in order to reach

scale efficiencies it is necessary to build a plant that produces

volumes in excess of what can be sold domestically. Netbacks for

export volumes, while exceeding variable or marginal cost, may not

necessarily cover total average cost per unit of production (i.e. all

costs plus a reasonable return). Therefore, when considering the

return earned by Sasol in this environment it is appropriate to

consider the average return across both domestic and export sales.

Without the export sales it would not be possible for Sasol to achieve

current scale economies.

60

88.13 The table below summarises the results of the economic returns

analysis, using both the return on capital employed (ROCE) and IRR

profitability measures. I am advised that these two measures are

extensively used by UK competition authorities when undertaking

market investigations.

per cent

Ave ROCE IRR

Stand-alone PP 2.7 8.3

Integrated PP 1.8 6.5

Integrated PP1 3.6 9.0 Integrated PP1 export prices -2.1 1.8 Integrated PP1 domestic prices 7.3 13.9

Average WACC 15.0

1995 to 2009

88.14 The above table shows that under all five business scenarios Sasol‟s

PP prices over the 15-year period were below economic value.

88.15 Over the period 1995 to 2009, average ROCE and IRR for Sasol‟s

stand-alone PP business were well below Sasol‟s WACC. This is

also the case for the integrated business where the underlying

economic costs of propylene are taken into account. ROCE and IRR

were below the WACC benchmark even if the relatively high capital

costs of the PP2 plant are excluded, as per the integrated PP1

scenario.

88.16 If export prices on all volumes are assumed (“Integrated PP1 export

prices”), the ROCE and IRR would have been extremely low and well

61

below the WACC in each year of the analysis. Even if all volumes

were sold at domestic prices (“Integrated PP1 domestic prices”),

returns would have been insufficient to provide Sasol an adequate

reward for capital invested. These results are consistent with the

view that PP prices, particularly export prices, were below economic

value.

88.17 The figures in the above table were calculated using an approach

that is likely to over-estimate the economic returns currently derived

by Sasol‟s PP business. First, a 15-year period was used, which is (I

am advised) well beyond the period range typically adopted by UK

competition authorities in their investigations into economic

profitability, and includes certain years (1995 to 1998) where

relatively high annual returns were observed. Average returns over

the most recent 10 years were materially lower than those shown

above. Second, Sasol‟s PP operating costs were adjusted marginally

to reflect the level of efficiency realised by leading PP operators

around the world. Adopting Sasol‟s actual PP costs would result in

lower economic return estimates than those shown above.

88.18 In any event, the logic of the Commission‟s allegations in

paragraph 57 is unsound. Where substantial fixed or capital costs

exist, a firm would be willing to export incremental volumes at prices

which cover marginal or variable cost but not necessarily full costs.

This is particularly the case if most of the capital costs are sunk, as in

62

the case for Project Turbo. However, the pricing of all volumes

(domestic and export) at this incremental level would not be

sustainable and would not allow for a reasonable return.

89 Ad paragraph 58

89.1 In this paragraph the Commission submits that export prices are

“clearly profitable prices for Sasol”, because it has decided to expand

production based on them. In this regard, the Commission refers to

Sasol's decision “to expand polypropylene capacity through Project

Turbo”.

89.2 It would not be appropriate to conclude that export prices represent

the economic value for PP produced in South Africa on the basis of

the fact that Sasol made the Project Turbo SCC, PPU5 and PP2

investments, for several reasons:

89.2.1 First, PP2 was not a stand-alone investment. As set out above,

the investment case for PP2 (including PPU5) was calculated

from a Sasol Group point of view and the expected benefit of

lower fuel exports was accrued to the PP2 investment;

89.2.2 Second, this investment decision was made on the basis that

PP2 would be characterised by comparatively low production

costs of propylene and PP (i.e. when compared to the production

costs of PP1 or a hypothetical stand-alone facility). This was

63

largely occasioned by the once-off legislated clean fuels

investment. Expansion of capacity may be considered if the

increased costs incurred in doing so are less than the increased

revenues from doing so. The fact that a particular expansion is

considered “profitable” on this basis, however, does not mean

that the price at which the additional output will be sold is above

the average cost of production for the whole business. Since

economic value must be determined with reference to the total

cost of production (indeed, total cost for the industry, rather than

for one specific business) PP2 cannot be used as a reliable

indicator that export prices reflect economic value. PP2 is not

representative of overall costs of production, inter alia, for the

following reasons:

(a) PP2 was a brownfield investment (i.e. on an established

site with existing infrastructure and an adjacent plant where

facilities e.g. workshops could be shared) in that it added an

additional PP plant to Sasol‟s existing PP production

capability. PP2 was able to make use of existing

infrastructure and services, and thus only incremental

capital and operating costs were considered in the

investment decision. As such the PP2 investment required

less capital and lower operating costs than a stand-alone

plant;

64

(b) PP2 also has a substantially larger capacity than PP1.

Capital and operating costs per ton of output decrease with

increased plant size. Typically a plant may be doubled in

size with an increase in capital of only about 60%. Fixed

costs will similarly increase well below direct proportion to

the output. The same number of staff may run a double-

size plant, and maintenance costs will rise in proportion to

the capital. Consequently, the average cost per ton of

output (including the required return) will come down. Thus

PP2 could be expected to benefit from additional scale

economies compared to the PP1;

(c) The feedstock price for both PP1 and PP2 is based on the

opportunity cost to Sasol Synfuels of providing this

feedstock stream to Sasol Polymers. However, the tranche

of feedstock identified for PP2 was anticipated (at time of

investment) to have a lower opportunity cost, and therefore

lower transfer price, compared to feedstock used for PP1.

In particular, the opportunity cost of feedstock to be used in

PP2 was anticipated to be based on export FAV whilst PP1

feedstock was based on local FAV. In other words for PP2

the basis of the feedstock cost was distressed fuel netbacks

as opposed to domestic FAVs in the case of PP1. This

meant that the underlying production costs of PP2 were

65

anticipated to be significantly lower than those of PP1 (or

a stand-alone PP producer for that matter);

(d) If PP2 was a standalone investment, the propylene

feedstock would need to be at its economic value and

considerable additional capital investment and operating

costs would need to be added in, as indicated in the table

below.

Capital investment Extra 20% +/- R1 billion extra

Operating costs + R74 million pa (people, spares, infrastructure)

+/- R250 per ton or 25% increase

Working capital (product stock)

32 000 tons extra to cater for own grades

+ R302 million

89.2.3 Finally, in the Project Turbo model PP2's feedstock is valued at

the opportunity cost to Sasol Synfuels. As set out in greater

detail below, this is well below a competitive price for such

feedstock. In line with the CAC‟s directive that any special cost

advantages should not be included in the calculation of economic

value it follows that the construction of PP2 therefore cannot be

accepted as an indication that export prices are a proxy for

economic value.

89.3 In summary, PP2 was based on a specific set of circumstances

which are distinct from a stand-alone PP plant and PP1. The fact

66

that PP capacity was expanded as a consequence of the

investment in PP2 does not establish that export prices represent the

economic value of PP. Accordingly, even if PP2 had been profitable,

it could not be used as a measure of the economic value of PP1.

89.4 In any event, it is not correct that export prices sufficiently reward a

stand-alone investment in PP in South Africa. This is demonstrated

above in the case of PP1 and below in the case of PP2.

89.5 The return expected to be earned by Sasol from potential

investments is weighed up against Sasol‟s internal investment hurdle

rate. Only if investments are anticipated to exceed this hurdle rate

are they undertaken. Sasol‟s internal investment hurdle rate for new

projects is 30% higher than WACC as counterbalance for projects

that are based on sustenance and statutory requirements that yield

returns below WACC. In this way the average return on all projects

is intended to meet at least WACC, thus avoiding the erosion of

shareholder value.

89.6 As noted above, the design of Project Turbo ultimately incorporated

investment in the PP value chain including: (1) the PPU5 propylene

purification column; and (2) the building of the PP2 facility for the

production of PP. The table below shows the anticipated return to

Sasol as a whole, as reflected in board meeting papers over time,

which was expected to be achieved from this incremental investment

67

(relative to Case F to which I have referred above). The figures for

November 2003 are those which I mentioned earlier.

Nov 2003 Nov 2006 May 2007 July 2010

IRR 21.60% 11.1% 10.00%

Not determinable i.e. negative

NPV R1197m -R152m -R430m -R2492m

Capital cost R3598m R5363 R5691m R6354m

WACC 14.75% 11.75% 11.75% 13.25%

Sasol hurdle rate 19.18% 15.28% 15.28% 17.23%

89.7 At the time of final approval (November 2003) incremental

investment in the PP value chain was expected to achieve a return of

21.60%, which was in excess of Sasol‟s WACC and internal hurdle

rate, and therefore seen as a viable incremental investment within

the context of the legislative dictate to produce unleaded fuel. The

base case for the PP2 investment was low grade petrol components

and petrol volumes in excess of sales within South Africa.

89.8 The initial projections of profitability anticipated from the PP

investment were based on the best available information at that time.

However, as investment cost and expected cash flow assumptions

became more certain and were updated, Sasol‟s projected IRR

dropped below WACC (and the internal investment hurdle) by 2006.

By the end of 2006, projections indicated that the PP2 investment

68

was not going to be commercially feasible (yielding a negative

NPV). Based on the 2006 projections the PP investment would not

have been made by Sasol.

89.9 However, by that stage the investment decision could not be viably

reversed due to the sunk costs already incurred (i.e. stopping the

project was deemed to be more costly than its continuation). Even

by Sasol‟s own internal estimates based on updated investment

information it is apparent that the export price of PP was insufficient

to justify the PP2 investment. Sasol‟s decision to continue with the

PP2 investment despite its revised economics does not indicate that

export prices cover economic value, but rather that this path was

assumed to be less costly than the alternative of ceasing the project

completely, given the costs already sunk.

89.10 It should be emphasised that these internal projections of inadequate

returns associated with PP2 were made by Sasol before any

competition investigation was initiated and were presented to various

Sasol board meetings as part of its internal management and

decision-making process. Accordingly, these updated profitability

assessments should be regarded as a more direct and reliable

indication of PP2‟s viability than the original investment decision

itself, which was based on economic assumptions and engineering

cost estimates. It would be incorrect to assume, as the Commission

appears to do, that because Sasol made the PP2 investment

69

decision, export PP prices are sufficient to cover costs and provide

a reasonable return on investment.

89.11 Profitability calculations for projects of this nature are done using a

DCF (discounted cash flow) model spanning a fifteen-year plant life.

Assumptions must be made about capital costs, feedstock costs,

exchange rate fluctuations, product price fluctuations, inflation rates

and many other matters over the full period of 15 years. By their

nature, these assumptions invariably differ, often substantially, from

reality. This is the risk that a business takes when embarking on a

new project of this nature. Reality has shown that Sasol Polymers'

key project assumptions did differ from reality and that the PP2

investment was not profitable as anticipated.

90 Ad paragraph 59

90.1 The allegations are denied.

90.2 If Sasol Polymers‟ own costs are used as a starting point, then in

order to arrive at the “notional objective competitive-market standard”

it is necessary to envisage a competitive market (not a perfectly

competitive one, but rather competitive enough to eliminate “pure

profit”, over the long run) within which Sasol Polymers operates. To

determine the economic value, I am advised that every cost or

saving, not incurred or enjoyed by other firms operating within that

market, ought to be excluded from the calculation. This would

70

include any cost saving enjoyed by virtue of Sasol Polymers‟

operating processes, or its bargaining power. Benefits or constraints

applicable, as a norm, to other firms within the hypothetical market,

such as low electricity costs, or high labour costs, would not,

however, constitute special circumstances and need not be excluded

to arrive at the notional objective competitive-market standard.

90.3 Sasol Polymers enjoys a special advantage from propylene

feedstock costs, which are lower than the notional competitive norm

due to the refining process which is part of Sasol‟s unique coal-to-

liquids technology. I refer to what is stated later in this affidavit in

paragraph 107 below. I emphasise that I am referring here to the

propylene feedstock from Synfuels – this should not be confused with

polymer-grade propylene extracted, purified and sold by Sasol

Polymers‟ Monomers business.

91 Ad paragraph 60

91.1 The Commission alleges that the prices of PP in a net surplus region,

such as South Korea, “which are in turn based on CFR Hong Kong

prices”, may be used as a reliable indicator of the economic value of

PP. Empirical evidence from numerous sources indicates otherwise.

The allegation is denied.

91.2 Sasol Polymers has not been able to obtain any data on domestic PP

prices in South Korea. CFR Hong Kong prices are, in and of

71

themselves, not an appropriate indicator of the economic value of

PP. The CFR Hong Kong PP price is the price of the polymer on the

ship in Hong Kong and excludes all the costs to deliver the polymers

from the ship to the buyer. Moreover, CFR Hong Kong prices reflect

excess production supplied primarily into China at prices that must

overcome tariffs of 6.5% in addition to the costs referred to above.

This often results in producers earning negative cash margins. The

Middle East has emerged as a large producer of PP based on the

discounted price of propane that is recovered from its oil fields.

Again, there is not a well-established and visible local merchant price

for PP in the Middle East. One sees prices quoted as CFR GCC

(Gulf Co-operation Countries) – e.g. by ICIS Pricing. The export-

alternatives for Middle Eastern producers depend on where the best

netbacks can be earned.

91.3 It is important to note that Sasol Polymers‟ South African prices are

fully delivered (FD) domestic prices which include technical service.

Typically order sizes are smaller on average than those for which

prices are quoted internationally by marketing consultancies. To

compare like-with-like, Sasol Polymers‟ prices and any foreign

comparator prices should be on the same basis. This would mean

isolating the larger customer prices on Sasol Polymers‟ side and

building up prices in, say, China or Korea from CFR Hong Kong

prices, which exclude part of the cost build-up present in FD prices.

72

Additional costs incurred in delivering products to final customers,

not included in CFR prices, include:

91.3.1 possible net additional costs to transport goods to another

harbour;

91.3.2 unloading costs;

91.3.3 costs associated with customs clearing;

91.3.4 handling costs;

91.3.5 warehousing;

91.3.6 transport costs to final destination;

91.3.7 import tariffs and local taxes; and

91.3.8 distributor margin.

91.4 I am advised that the CAC has held that prices charged by other

firms with broadly comparable cost structures as the dominant firm at

comparable levels of output may serve as a measure of the

economic value of the same good or service in the South African

market, if the other markets are shown to be, or can be assumed to

be, characterised by effective competition in the long run. The

Commission has made no attempt to demonstrate, indeed it has not

even alleged, that prices of PP in South Korea or the CFR Hong

Kong prices, on which it relies, are prices offered by firms with

73

broadly comparable cost structures at comparable levels of output

as Sasol Polymers.


92.1 As noted above, Hong Kong CFR and export prices are not reliable

indicators of economic value.

92.2 In any event, it appears that the Commission‟s calculations are

incorrect. For example for the period indicated by the Commission

(2005-2007) ex-works domestic prices for homopolymer grade PP

were on average 15% above the CFR Hong Kong price, not 20% as

alleged by the Commission.

92.3 As noted above, between January 2000 and December 2009, the

average ex-works netback for domestic sales was only 16.3% higher

(on a weighted basis) than the average Sasol Polymers‟ ex-works

export netback.

92.4 Accordingly, the allegations in these paragraphs are denied.


These allegations have been dealt with above. Cost of production on its

own is not a valid measure for economic value.

74

94 Ad paragraph 66

94.1 As noted above, the calculation of economic value requires an

assessment of the competitive level of operating costs, meaning that

any unique cost advantages experienced by a firm should be added

to that firm‟s operating costs.

94.2 There is no reason why the reasonable relationship assessment

should be stricter (i.e. allow a smaller difference between price and

economic value) for those firms that have unique cost advantages,

which is what the Commission appears to be arguing in this

paragraph. As economic value is a notional concept applicable to all

firms, whether they have cost advantages or not, the assessment of

whether the relationship between prices and economic value is

reasonable should be applied equally to all firms in a market. A more

lenient test for firms with a higher cost base is not consistent with the

promotion of efficiency in a market, and punishes those firms that

have invested in improving operating efficiencies and practices.

95 Ad paragraph 67

The allegation is denied. The Commission's complaint that Sasol

Polymers' PP prices in South Africa are excessive should be dismissed.


96.1 The allegations in these paragraphs are denied.

75

96.2 I am advised that according to research by Professor Fedderke on

the elasticity of polymers, the demand for PP is inelastic. For as

much as 80% of application types11, PP constitutes such a small

proportion of the end-price of the product that it cannot impact on the

demand elasticity for the final product. Accordingly, the

Commission‟s view that higher input prices for manufacturers using

PP suppress sales is incorrect.

96.3 The automotive industry, referred to by the Commission in

paragraph 72 of its referral, is a good example of where the PP

content is so small that it cannot possibly influence the final product

price. It is estimated that the average car contains between 30 kg

and 46 kg of PP. At a domestic PP price of around R10/kg the PP in

the car will cost no more than R460, compared to the price of a car of

several hundred thousand rand. Even at a greatly reduced price it

would make minimal, if any, difference to the price of cars.

96.4 A car bumper cover typically weighs 3.7 kg. This is a mineral-filled

PP compound which contains roughly 3 kg of PP. At R10/kg the

polymer cost is R30 per bumper. Bumpers sell for R5 000 to R6 000

11 Study of the impact of upstream pricing practices in the chemical sector on the development

of the South African Chemical sector as a whole. Ozone Business consulting, CMCS, Terry le

Roux and Conningarth Economists.

76

each. Some examples in the packaging industry further illustrate

the point that the polymer cost is a small fraction of the final product

price. A woven cloth bag for the cement or maize industry contains

about 80 grams of PP i.e. the cost is R0.80 per bag. Cement sells

for approximately R80 per bag. A 5-litre paint container contains 240

grams of PP and thus the polymer cost is R2.40 per container which

sells for R400 when filled with paint. A litre yoghurt cup weighs 40

grams and thus costs R0.40 in polymer. Yoghurt sells for roughly

R20 per litre. An HTH bucket weighs 750 grams and thus costs

R9.00 for the PP while the product is sold at R250 in the shops. In

PP carpeting the weight of PP fibre and backing is approximately 770

grams per m2. The PP cost is thus between R7.70 and R8.50 per

m2. Carpeting sells for anything between R140 to R380 per m2.


There are a number of oil refineries in South Africa which operate an

FCC and hence produce propylene-containing streams, totalling an

estimated 348 000 tons. This puts Sasol at 72% of the country‟s

propylene capacity. To Sasol Polymer‟s knowledge, it is only at Sapref

and Natref where PPUs have been built. Sasol Synfuels is the largest

producer of propylene-containing feedstock in South Africa, and Sasol

Polymers has access to a portion of this feedstock. It is denied that the

market is uncontested and incontestable since it is suspected that not all

77

of the propylene is extracted at Sapref and none at Enref, Calref and

PetroSA.

98 Ad paragraph 77

98.1 Sasol Polymers has no knowledge of the prices paid by Safripol for

the tranche of propylene that it sources from Sapref.

98.2 Nevertheless, it should be noted that in the early 2000s Safripol

readily accepted Sasol Polymers‟ offer to deliver propylene by

pipeline as opposed to rail-tankers, which had been the mode of

supply for many years. This appears to indicate that the delivered

price of propylene from Sapref was higher than the Sasol Polymers'

propylene price determined via the price formula.

98.3 Accordingly, the allegations in this paragraph are denied.

99 Ad paragraph 78

99.1 The allegations are denied. Sasol Polymers' propylene prices are

not IPP-based. The mechanism by which Safripol's propylene price

is set will be addressed later in this affidavit.

99.2 The weighted-average actual price for propylene paid by Safripol

compares favourably with the actual contract prices for propylene in

the US and Western Europe. Over the period 1997 to 2009, the

difference in the weighted average local propylene prices to the

contract prices in these two regions was less than 0.5%. This direct

78

comparison indicates that the local propylene price is not IPP-

based. (See the graph provided under paragraph 110 below).

99.3 Moreover, the price paid by Safripol for propylene is on average 31%

lower than IPP from the US Gulf Coast (a region which has surplus

propylene product).

100 Ad paragraph 79

I have no knowledge of Sapref's capacity. Sasol Polymers' best estimate

is that Sapref has a PPU capable of extracting up to 35 000 tons per

annum. Based on our understanding of Sapref‟s FCC capacity it can

produce up to 50 000 tons per annum of propylene molecules. If so, it is

indeed capable of offering additional volumes of propylene to Safripol. It

has long been Sasol Polymers' understanding that Safripol is not

consuming anywhere near the 35 000 tons per annum that it could

procure from Sapref (based on our sales of propylene relative to our

understanding of Safripol‟s installed PP capacity). Also, Safripol

continues to claim export rebates and hence has additional product for

sales into South Africa. Safripol has taken its full allocation of propylene

from Sasol Polymers over the past seven years. Accordingly, the


101 Ad paragraph 80

For the reasons set out above, the allegations are denied.

79


Save to say that there are other sources of propylene in SA, the

allegations in these paragraphs are not denied.

103 Ad paragraph 84

The Commission says that there is no shortage of supply of propylene in

South Africa. This contradicts allegations in other paragraphs of the

complaint referral. To the extent that the Commission indeed contends

that there is surplus capacity of propylene in South Africa, this is denied.

104 Ad paragraph 85

The allegations are denied. Sasol Polymers' position in the local

propylene market and its ability to provide Safripol with propylene that is

competitively priced, measured by world standards, is largely (if not

entirely) due to innovation and risk-taking, and to some extent asset

efficiency. It is through innovation and risk-taking that Sasol has become

the world‟s only producer of propylene from coal. In addition, Sasol has

been able to extend the use of its propylene assets well beyond their

installed lifetimes with upgrades and renovations costing a fraction of the

new replacement cost of these assets.

105 Ad paragraph 86

The allegations are denied.

80

106 Ad paragraph 87

As noted above, Sasol Polymers' export prices for PP are not reflective

of the price in a competitive market. The export price is not sufficiently

profitable to cover costs plus a reasonable rate of return. It follows that

the approach of the Commission to the economic value of propylene,

reflected in this paragraph, is fatally flawed.

107 Ad paragraph 88

107.1 Refinery-grade or impure propylene may be extracted, purified and

sold, or alternatively it may be converted by further processing into

fuel. This is so for both Sasol Synfuels and for conventional oil

refineries. The price at which a propylene producer is financially

indifferent as to whether the propylene is extracted or converted to

fuel is known as the “fuel alternate value”, or FAV, of the propylene.

107.2 Sasol Polymers benefits from cost advantages in its production of

propylene. This is due to the relatively lower alternative fuel value of

propylene converted via the CatPoly process as a starting point for

fuels production. In most countries petrol trades at a premium to the

oil price. This puts the propylene FAV (due to its octane gain in

alkylation and hence its higher value in petrol) at a price of „petrol

plus‟.

81

107.3 In Sasol‟s case, because of the relatively higher volume of

propylene feedstock produced in its synthetic fuels process, a

CatPoly process is used for converting propylene into fuel blend

components. These products have a lower octane value than

equivalent alkylation products. For this reason the propylene FAV

has a lesser value in petrol through lower octane gain and is thus

priced at „petrol minus‟. This sets the transfer price of the propylene

feedstock to Sasol Polymers which comprises 85% of variable

production costs of polymer-grade propylene after purification in a

PPU. In other markets, propylene is mostly made from steam

cracking of naphtha and refining of petroleum with very different

costs of production. Sasol Synfuels‟ synthetic fuels process allows

Sasol Polymers to acquire feedstock at a cost lower than the normal

cost of feedstock from oil refineries – either naphtha or refinery-grade

propylene.

107.4 A comparison between Sasol‟s propylene feedstock costs and two

alternative proxy market valuations of feedstock produced from oil

refineries shows that over the period 1994 to 2009:

107.4.1 The proxy South African refinery floor value for propylene

feedstock (which is the notional indifference price for a refiner to

extract propylene) was calculated for Sapref based on well-

known refinery models. This was on average 24.5% higher than

Sasol Polymers‟ feedstock price from Sasol Synfuels.

82

107.4.2 The quoted refinery-grade propylene prices in the US Gulf

which a propylene splitter operator would pay for feedstock were

on average 28.4% higher.

107.5 As noted above, I am advised that the CAC has indicated that it is

necessary to disregard any special advantage that results in costs

lower than the “notional competitive norm”. The calculated South

African refinery floor prices provide a fair proxy for the notional

competitive norm of the feedstock used for propylene production:

107.5.1 The proxy price was modelled using quoted refinery-grade

propylene prices in the US market, which is heavily traded with a

number of competitors and therefore likely to be competitive.

107.5.2 Sasol is the only known producer of propylene feedstock from a

synthetic fuels process based on coal.

107.6 In summary, the above cost comparisons show that Sasol Polymers

incurs feedstock costs which are much lower than the notional

competitive norm due to its parent company‟s unique synthetic fuels

technology. The Commission's claim that Sasol does not enjoy any

special cost advantages in its production of propylene is thus

incorrect.

107.7 Accordingly, when calculating the economic value of propylene, it is

necessary to make adjustments to Sasol Polymers' cost base to

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reflect the notional competitive norm, i.e. to reflect the market

prices that would be incurred by other propylene operators not

benefiting from Sasol‟s low-cost synthetic fuels feedstock.

108 Ad paragraph 89

The allegations in this paragraph are too vague for me to provide a

meaningful response. The Commission does not identify the price

allegedly used by Sasol in its own internal calculations, which it contends

can be used as a reliable indicator of economic value of propylene.

Sasol Polymers does not internally value propylene any differently from

what it charges Safripol for propylene as per the supply agreement.


109.1 The allegations in these paragraphs are denied. I do not know the

source of the Commission‟s figures or how it calculated the

differences for these calculations. To the best of Sasol Polymers'

knowledge the claims are simply incorrect.

109.2 It should also be noted that to the extent the Commission's figures

have been taken from Project Turbo illustrations, a number of

assumptions regarding oil and feedstock prices are unsound.

110 Ad paragraph 93

110.1 Again, cost of production on its own is not a valid measure for

economic value. As noted above, I am advised that the primary test

84

for excessive pricing is to enquire whether prices are unreasonably

above costs (adjusted for efficiency or unique cost advantage) plus

some reasonable return.

110.2 Accordingly, economic returns were calculated for the propylene

business for the 1995 to 2009 period. As per the approach adopted

for calculating PP returns, adjustments were made to the operating

cost base of the propylene business to take into account unique

operating advantages such as access to low cost refinery grade

propylene feedstock. Also, the replacement cost of the propylene

assets was calculated with reference to book values of individual

propylene assets adjusted for movements to the construction price

index over the period. This index provides a reasonable proxy for the

changes in the underlying value of the propylene assets.

110.3 Assuming that operating costs are adjusted to take into account

access to low cost refinery grade propylene feedstock, Sasol‟s

propylene‟s returns, disclosed in the table below, show that the

average ROCE and IRR were well below Sasol‟s WACC over the

1995 to 2009 period. Our adjustment to the feedstock cost is

conservative as it does not include any margin on top of operating

costs that would be incurred by a hypothetical provider of refinery

grade propylene.

85

per cent

Ave ROCE IRR

Propylene 5.3 12.8

Average WACC 15.0

1995 to 2009

110.4 Another useful measure to assess Sasol Polymers‟ propylene

profitability is Economic Value Added (EVA), which measures the

extent to which revenues have exceed economic costs, including a

reasonable return on assets. EVA can be calculated by deducting

the post-tax cost of capital on assets from post-tax operating profit.

Sasol Polymer‟s EVA estimate for its propylene business was

negative R711 million during the 1995 to 2009 period, meaning that

operating profits were insufficient to cover the opportunity costs

arising from the investments in propylene assets. Accordingly, the

prices of Sasol Polymers' propylene were not in excess of

propylene‟s economic value.

110.5 As per the PP analysis, the estimates of propylene returns were

calculated taking into account years (1995 to 1998) where economic

returns were relatively high compared to the returns currently derived

by Sasol‟s propylene business. In addition, Sasol‟s propylene assets

have been largely depreciated (i.e. operating well beyond the useful

lives of the assets), and therefore the asset values assumed in the

returns analysis, particularly for the U70 and U288 propylene plants,

are very low. Accordingly, the average ROCE estimate shown above

86

is likely to be an over-estimate of the long-term returns available

from Sasol‟s propylene business.

110.6 Moreover, South African propylene prices are in line with actual

contract propylene prices in the US and Western Europe. The

average percentage difference between South Africa and US and

Western Europe prices is less than 0.5%. The data used for this

calculation includes quarterly average selling prices for propylene.

These represent delivered prices (ex-pipeline). For the US and

Europe, ICIS Pricing contract prices were used. These are delivered

prices (ex-pipeline). Pipeline costs are unknown but are assumed to

be small as a proportion of prices.

-

200

400

600

800

1,000

1,200

1,400

1,600

1997199819992000200120022003200420052006200720082009

USD

Weighted local price USA Western Europe

111 Ad paragraph 94

I repeat the allegations in paragraph 94 above (Ad paragraph 66).

87

112 Ad paragraph 95

Propylene is not sold to consumers. Thus the Commission bases its

case on the notion that excessive propylene prices lead to excessive PP

prices to the detriment of the consumer. I repeat the allegations in

paragraph 95 above (Ad paragraph 67).

113 Ad paragraphs 96-105 (generally)

113.1 As indicated above, the complaint against SCI in terms of

section 4(1)(b)(i) of the Act has been settled in terms of a settlement

agreement between the Commission and SCI and has been admitted

to the extent stated in clause 5 of that agreement. I have been

advised that, in the circumstances, it is not necessary for me to

answer the allegations in paragraphs 96 to 105 save insofar as they

are relevant to the complaints against SCI in terms of section 8(a) of

the Act (Ad paragraphs 96-98)

Background to conclusion of propylene supply agreement

113.2 To the best of SCI‟s knowledge:

113.2.1 Safripol was established in 1972 as a joint venture between

Sentrachem Limited (“Sentrachem”) and Hoechst South Africa

(Pty) Limited (“Hoechst”), a subsidiary of Hoechst AG (one of the

world‟s largest chemical manufacturers at the time);

88

113.2.2 Safripol commenced producing polypropylene in 1978 using

propylene from Sapref and imports through Richards Bay.

113.3 As indicated above, Sasol Polymers (Pty) Ltd, a member of the Sasol

Group, entered the PP market in 1990 with the establishment of a PP

plant and a PPU for the extraction of polymer-grade propylene from

Sasol Synfuels‟ feedstocks. Sasol Polymers (Pty) Ltd began to

supply propylene to Safripol in the period 1989/90.

113.4 In 1993 Sasol Ltd and AECI agreed to merge their respective

monomer, polymer and certain other chemicals operations in a joint

venture called Polifin (Pty) Ltd, later to become Polifin Ltd (“Polifin”).

In terms of the proposed merger, Sasol‟s ethylene, propylene and PP

operations were combined in Polifin with AECI‟s PVC, LDPE and

LLDPE operations (inter alia).

113.5 The origin of the current propylene supply agreement between Sasol

Polymers and Safripol lies in concerns raised by the shareholders of

Safripol (i.e., Sentrachem and Hoechst) with the Competition Board

regarding the above merger. Their principal concern was that the

vertical integration brought about by the merger would enable the

merged entity (Polifin) to control the scope of the growth and viability

of Safripol‟s polymer business. At the time, Sasol was the only

producer of ethylene in South Africa and was also responsible for

over 80% of the propylene produced in the country.

89

113.6 In its assessment of the proposed merger dated 4 October 1993

(“the Competition Board report”), the Competition Board found that

the merger would enhance the possibility of anti-competitive conduct

by the merged entity, and in particular the possibility that “the merged

entity could foreclose Sentrachem/Hoechst from adequate supplies

of monomer feedstocks or discriminate against them in other ways,

thereby placing them in an untenable competitive position”

(paragraph 73).

113.7 One of the proposals made by Sentrachem and Hoechst to address

their concerns was the conclusion of enhanced long-term

agreements between the merged entity and Safripol for the supply of

propylene and ethylene which would protect Safripol against any

anti-competitive conduct by the merged entity. The merger parties

agreed to this proposal and also assured the Competition Board that

the merged entity would undertake to honour all objectively justifiable

claims by Safripol to a portion of any growth in Polifin‟s monomer

feedstocks, and also to supply such feedstocks to Safripol on a non-

discriminatory basis (see paragraph 75).

113.8 Another factor that protected the competitive position of Safripol, and

which is reflected in the Competition Board report, was that the

ethylene price would be based on the international market price ratio

of ethylene/PE and local PE selling prices (paragraph 21(3)(d)). This

pricing formula was introduced at the instance of Safripol and its

90

shareholders in order to protect Safripol‟s gross margins

throughout the price cycle. The parties also agreed to conclude a

propylene supply agreement on the same formula basis.

113.9 The effect of the above formula was to ensure that the price paid by

Safripol for ethylene and propylene in South Africa was related to the

price relationship between those monomers and the respective

polymers (PE and PP) in international markets where (unlike South

Africa) monomers were actively traded as applied to the selling price

of such polymers in South Africa.

113.10 Because Polifin and Safripol accounted for most of the domestic

sales of PE and PP, the pricing formula inevitably required the

parties to disclose information about their polymer prices so that the

monomer prices could be calculated. I explain this in greater detail

below.

113.11 On the basis of the undertakings made by the merger parties, the

Competition Board concluded that it was not necessary to launch a

formal investigation into the proposed merger (paragraph 76), and

the parties proceeded to negotiate and conclude the propylene and

ethylene supply agreements on 8 December 1994.

91

Propylene supply agreement

113.12 A copy of the propylene supply agreement concluded between Polifin

and Safripol on 8 December 1994 is attached to the Commission‟s

founding affidavit marked “IL5”.

113.13 In terms of clause 5 of the supply agreement, Polifin undertook to

supply to Safripol up to 55 000 tons of propylene out of its total

propylene production capacity at that time of 200 000 tons. If Polifin

expanded its production capacity, Polifin would have sole entitlement

to the next 20 000 tons, but thereafter Safripol would have the option

to purchase “an objectively justifiable portion of such propylene on a

non-discriminatory basis” as referred to in paragraph 75 of the

Competition Board report referred to above.

113.14 The pricing provisions relating to the supply of propylene to Safripol

are contained in clause 10 of the agreement. As appears therefrom,

clause 10 contains different pricing formulae for propylene purchased

for the production and sale of PP in South Africa on the one hand,

and for exports on the other. Within each category, there are also

different pricing models for the first three years after the

commencement date (26 June 1994) and for the period thereafter.

113.15 Sasol Polymers has not been able to locate a copy of the propylene

supply agreement that was in place between Sasol Polymers (Pty)

92

Ltd and Safripol prior to 1994, and which the existing agreement

replaced. However, it is believed that:

113.15.1 the pricing formula for the first three years of the new agreement

was the same formula that had applied in the previous

agreement; and

113.15.2 the reason for the retention of the previous formula for the first

three years of the new agreement was that the new formula was

based on a three-year rolling average of international

propylene/PP price ratios which first needed to be calculated

before the new formula could be applied.

113.16 It is a common feature of commodity trading (including polymers) that

export prices are, on average, significantly below domestic prices.12

This reflects the economic reality that it is beneficial for producers to

run their plants at full rates, provided that the income from the

marginal sale of product exceeds the variable cost (raw material plus

utilities plus catalyst and chemicals) of manufacture. In this way,

export sales still make a contribution to the fixed costs of the

operations, thereby improving overall profitability.

12 By export price is meant the FOB (Free on Board) price at the port of dispatch of the product,

and not the delivered price paid by the customer who is purchasing (importing) the polymer. The true price of the export for delivered polymer paid for by the customer (which is then comparable to the domestic price) will include the freight, duty, insurance and other transport costs to take receipt of the polymer at the customer‟s gate.

93

113.17 Capital intensive plants have high fixed costs, whether or not they

are running. Running plants at high rates also has the added benefit

of increasing efficiencies and staying above turn-down limits of

plants. If these limits are not maintained, plants could be forced to

operate intermittently, thereby incurring additional costs.

113.18 Consequently, countries that have excess capacity typically export

product at a lower FOB price than the delivered domestic price of

such product.

113.19 As a result, regions in deficit attract marginal exports and often serve

as a dumping ground for “excess” product, leading to prices dropping

to levels that are unsustainable, particularly at the bottom of the

economic cycle. Because Sasol Polymers and Safripol were (and

are) price-takers for their exports, the parties developed and agreed

to a different pricing formula for propylene used in polypropylene that

made it economically viable for them to sell product into, and to

compete effectively in, export destinations.

Domestic pricing formulae

113.20 As regards the domestic pricing formula (set out in clause 10.1 of the

agreement), the formula used for the first three years of the new

supply agreement reflected an import parity pricing model. It was

based on:

94

113.20.1 the average monthly North-West European and US Gulf

delivered contract and spot prices for propylene converted into

Rand; plus

113.20.2 the current average seafreight rate paid by Safripol on propylene

imports; plus

113.20.3 the actual contract railage rate granted to Safripol by Spoornet

for the transport of propylene from Richards Bay to Safripol‟s

plant in Sasolburg.

113.21 The average of the North-West European and US Gulf prices for

propylene was used as the basis for the pricing formulae because

those were markets in which propylene was (and continues to be)

heavily traded. Indeed, North-West Europe and the US were at the

time of setting up the agreement the major markets in which

propylene and ethylene were actively traded, and prices for the

monomers in those areas was therefore used as a reference point for

monomer prices in various other parts of the world. These included

South Africa, where there were no local merchant monomer sales

from which domestic prices for propylene or ethylene could be

determined. Significantly, Safripol‟s shareholder Hoechst was one of

the largest ethylene suppliers in Europe at the time and evidently

regarded the use of an international benchmark as an equitable basis

for determining South African monomer prices. It continues to be

95

common practice for regional monomer prices to be determined by

reference to prices in North-West Europe and the USA and an

appropriate adjustment factor.

113.22 In terms of the supply agreement, this import parity pricing model fell

away after the first three years. Sasol Polymers believes that the

parties may have agreed to do so for the reason that propylene is

expensive to transport, and consequently the model could have

resulted in the payment of monomer prices that were at times

prohibitively high relative to the prices that Safripol (and Polifin) could

achieve for their PP products domestically.

113.23 The domestic pricing formula that the parties agreed to apply after

the first three years of the new agreement addressed these

considerations. It was no longer based on import parity pricing

principles as before but rather on the principle that the domestic price

of propylene should be derived from an international price ratio

between propylene and PP as applied to the domestic price of PP.

This ensured that the price Safripol paid for propylene was based on

an international benchmark as applied to the domestic price of PP.

113.24 The relationship between the price of propylene and PP in the

domestic pricing formula was based on a three-year rolling average

of the international propylene/PP price ratio, which in turn was

96

derived from the average of the average monthly North-West

European and US propylene and PP contract prices.

113.25 As previously indicated, contract prices in North-West Europe and

the US were used as the basis for this calculation because they were

large markets with substantial trade in monomers and polymers, and

were therefore regarded as providing an accurate reflection of the

price relationship between propylene and PP prices in an efficient

market.

113.26 The use in the pricing formula of a three-year rolling average of the

international propylene/PP price ratio smoothes the effects of the

significant volatility in international propylene and PP prices which

can be problematic for smaller operations such as those of Safripol.

113.27 This average price ratio was then applied to the average of the net

weighted average packed delivered prices for PP produced and sold

domestically by both Polifin and Safripol in order to derive the price of

propylene for the production thereof. Polifin and Safripol accounted

for most of the PP sold in South Africa, and the average of their

domestic prices was therefore seen as an accurate reflection of the

prevailing price for PP in South Africa.

113.28 Clause 10.1 provided further that in the event that the above

formulae no longer provided an equitable basis for determining the

price of PP, the parties would renegotiate them in good faith.

97

113.29 In November 1997 the parties concluded a letter of understanding

regarding the method for determining the propylene database in

order to derive the price ratios on which the propylene prices would

be calculated. A copy of that letter of understanding, which is stated

to be effective as of the commencement date of the main agreement,

is included in annexure “IL5” to the Commission‟s founding affidavit

as “Letter of understanding 2”. As appears therefrom, it was agreed

that the source document for monomer prices would be the Tecnon

Monomer Report and the source document for polymer prices would

be the Tecnon Polyolefin Report.

113.30 The methodology initially agreed for implementing the domestic

pricing formula in terms of clause 10.1 was that, not less than

30 days prior to the commencement of each accounting quarter,

Polifin would inform Safripol of a provisional price for that quarter

based on both parties‟ best estimates of their respective net weighted

average prices for domestic PP sales for that quarter (“PP” for Polifin

and “PP1” for Safripol). This gave both parties (i.e. Safripol and

Polifin‟s downstream polymers business) an indication of the price

they would be paying for propylene for the following quarter for

purposes of their advance negotiation of PP sales.

113.31 Then, within four weeks after the end of each accounting quarter, the

parties would provide to each other their actual net weighted average

packed delivered prices for domestic PP sales during that quarter.

98

On that basis, the final price of propylene would be calculated and

the necessary price adjustments would be made, and debit or credit

notes issued, within 14 days thereafter.

113.32 The methodology initially agreed in terms of clause 10.1 thus

contemplated an exchange of provisional average quarterly prices at

least 30 days before the commencement of each accounting quarter,

and then an exchange of actual average quarterly prices within four

weeks after the end of that quarter.

113.33 In this manner, the parties sought to obtain as accurate an indication

as possible of the prices that would be invoiced for propylene in

respect of any given quarter, and to minimize the price adjustments

that would need to be made after the end of each quarter.

113.34 As set out further below, this methodology has been revised

somewhat in recent years.

Export pricing formulae

113.35 As reflected in clause 10.2, there was also a difference in the export

pricing formula for the first three years after the effective date of the

agreement and for the period thereafter. The reason for this

difference has been set out above.

113.36 As regards the first three-year period, the price for propylene used to

produce PP for exports was simply a fixed percentage (0.56) of the

99

weighted average of Safripol‟s packed ex-works price for

polypropylene produced in South Africa for export sales in the

relevant quarter. Sasol Polymers believes that the fixed percentage

was based on an established European price ratio13 at the time of the

previous agreement, and it was accordingly insensitive to significant

movements in the relation between propylene and PP prices in

different international markets over time.

113.37 For this reason, the export formula that the parties agreed to apply

after the first three years of the new agreement was, like the

domestic pricing formula, based on a three-year rolling average of

the international propylene/PP price ratio.

113.38 In addition, a minimum floor price was provided for in the formula

based on the FAV of the relevant feedstock. This protected Polifin in

the event that the international price of PP dropped to a level which

made it uneconomic for Polifin to continue supplying propylene to

Safripol in terms of the export formula.

113.39 As regards the manner of implementing the export formula, it was

agreed that Safripol would initially pay Polifin the full provisional local

13 Sasol Polymers does not know whether this particular price ratio (which is also reflected in the

ethylene supply agreement) reflected the price ratio between propylene and polypropylene, or between ethylene and polyethylene, or indeed a more general price relationship between monomers and polymers in the European market.

100

propylene price as per clause 10.1 of the agreement. Safripol

would then submit its (actual) historical weighted average ex-works

price for PP exports to Polifin within four weeks after the end of the

accounting quarter, on which basis the final price would be calculated

and the necessary price adjustments would be made, and debit or

credit notes issued, within 14 days thereafter.

113.40 In November 1998 the parties concluded a letter of understanding

relating to the methodology for calculating export prices as

contemplated in clause 10.2 of the propylene supply agreement. A

copy of that letter of understanding, which is stated to be effective

from 26 June 1996, is included in annexure “IL5” to the

Commission‟s founding affidavit as “Letter of understanding 3”.

June 2000 addendum

113.41 In June 2000 the parties signed an addendum to the propylene

supply agreement in terms of which the second last paragraph of

clause 10.1(b) (dealing with the provisional pricing) was deleted and

substituted with effect from 26 June 1999 by the following:

“Safripol shall be informed of an estimated and a provisional price for each Accounting Quarter. Both prices shall be based on the above formula and Polifin’s best estimate of the values of PP and PP1 during the Accounting Quarter for which the prices are being determined. The estimated price shall be advised by Polifin to Safripol not less than thirty (30) days prior to the commencement of each Accounting Quarter. The provisional price shall be given by Polifin to Safripol not less than four (4) days prior to the

101

commencement of each Accounting Quarter. The final price for each Accounting Quarter shall be calculated within four (4) weeks of the end of each Accounting Quarter. Price adjustments shall be made, and the necessary debit or credit notes shall be issued, within fourteen (14) days of the date on which the final price was calculated.”

113.42 A copy of that addendum is included in annexure “IL5” to the

Commission‟s founding affidavit as “Addendum 12”.

113.43 It is apparent from the above addendum that the major change

brought about thereby was to remove the requirement that Safripol

provide its best estimates of its average domestic sales to Polifin in

advance of each accounting quarter. Instead, the addendum

provided that the propylene price for the next accounting quarter

would henceforth be based on Polifin‟s best estimate of both its own

price (PP) and Safripol‟s price (PP1). Polifin then communicated to

Safripol an estimated price of propylene not less than 30 days and a

provisional price of propylene not less than 4 days before the

commencement of the next accounting quarter.

113.44 In recent years, Sasol Polymers has estimated (Safripol‟s) PP1 price

as being 95% of Sasol Polymers‟ (own) PP forecast quarterly price.

This figure represented an approximation of the observed

relationship between Sasol Polymers‟ and Safripol‟s domestic PP

prices (across all grades) over time. Safripol is provided only with

the estimated and provisional propylene prices. Safripol is not

102

informed of the breakdown of the variables or of the basis on

which the latter is calculated.

113.45 Also, Sasol Polymers within each quarter conducts a monthly review

of the provisional price for that quarter based on its own PP, and

Safripol‟s derived PP1, for the past months, and its more accurate

estimated prices for the remaining months, in that quarter. In the

event that there is a material difference between the original and the

refined provisional price calculated in this manner, Sasol Polymers

will invoice Safripol on the basis of the refined provisional price. In

this way, the price adjustments that need to be made after the end of

each quarter are further reduced.

December 2006 addendum

113.46 In December 2006 the parties agreed to a further amendment to

clause 10 of the agreement, a copy of which is included in annexure

“IL5” to the Commission‟s founding affidavit as “Addendum 25”.

113.47 As appears therefrom, this amendment incorporated the changes

contained in the previous addendum and also provided for an

increase in the ratio applicable to sales of propylene between the

contractual amount of 55 000 tons per annum and the amount of

100 000 tons per annum. This formalised the practice that had been

in place since 1998.

103

113.48 As explained above, the basis for the additional price charged to

Safripol (and Polifin‟s downstream polymers business) for these

additional quantities was the fact that both the feedstock and the

operating costs of the new splitter (PPU3) used to produce the

additional volumes were significantly higher than those associated

with Polifin‟s existing splitter (PPU1).

Cessions

113.49 Subsequent to the conclusion of the propylene supply agreement in

1994, there have been changes in the identities of the parties to the

agreement and in Safripol‟s controlling companies.

113.50 During or about 1997 Sentrachem, one of the shareholders in

Safripol, was purchased by Dow Chemical Company, a major

international science and technology company, through its subsidiary

Dow Plastics Southern Africa (Pty) Ltd (“Dow”), although that did not

result in any change in the parties to the supply agreement itself.

113.51 During or about March 1999 Sentrachem purchased Hoechst‟s

shareholding in Safripol, with the result that Dow became the

(indirect) controlling company of Safripol.

113.52 In March 2001 Polifin ceded all its right, title and interest, and

delegated all its obligations, in and to the propylene supply

agreement to Sasol Polymers with effect from 1 September 2000.

104

113.53 In July 2001 Safripol likewise ceded all its right, title and interest,

and delegated all its obligations, in and to the propylene supply

agreement to Sentrachem.

113.54 More recently, in December 2006, and pursuant to Dow‟s sale of its

shareholding in Sentrachem, Sasol Polymers consented to the

cession and delegation of the rights and obligations of Sentrachem

under the propylene supply agreement to Main Street 415 (Pty)

Limited (which has since changed its name to Safripol (Pty) Limited).

To the best of SCI‟s knowledge, ABSA Capital, a division of ABSA

Bank Limited, is the major (indirect) shareholder in the “new” Safripol.

Settlement agreement

113.55 As indicated above, SCI has admitted in terms of clause 5 of the

settlement agreement that the propylene pricing formula and related

provisions of the supply agreement, and its implementation, amount

to the indirect fixing of a price or a trading condition, in contravention

of section 4(1)(b)(i) of the Act.

113.56 In terms of clause 6.1.3 of the settlement agreement, SCI has agreed

to use its best endeavours to reach agreement with Safripol

regarding the amendment of the pricing and volume restriction

provisions contained in the supply agreement within a defined time

period so as to ensure that the supply agreement, as amended, does

105

not result in a contravention of the Act. In particular, SCI has

undertaken to use its best endeavours to ensure that:

113.56.1 the price of propylene will be set independently from that of

polypropylene and any requirement to exchange any information

relating to polypropylene prices and volumes will be removed;

and

113.56.2 the second tranche of propylene purchased by Safripol for the

domestic market will no longer be sold at a higher price.

114 Ad paragraph 99

114.1 As stated above, the polypropylene prices of Sasol Polymers and

Safripol have differed throughout the relevant period, mostly by

approximately 5% but sometimes by over 10%.

114.2 Whilst the parties attempt to differentiate their product offerings on

the basis of factors such as quality, delivery time, and reliability of

supply and inventory, the commoditised nature of PP means that

their PP prices for comparable products would not be expected to be

significantly different. In fact, this is entirely consistent with a

competitive outcome for similar products and is not the result of any

agreement or concerted practice between the parties.

106

115 Ad paragraph 100

Save as stated in clause 5 of the settlement agreement, the allegations in

this paragraph are denied for the reasons set out below.

116 Ad paragraphs 101 to 102

116.1 I am advised that the theory advanced in this paragraph is, upon

analysis, an overly simplistic one. In particular, the theory is based

on an incorrect assumption that either party has an incentive to raise

their PP prices as a result of the price formula.

116.2 In setting their respective PP prices, both parties will seek the

optimum balance between price and volume. The pricing formula in

the supply agreement does not shift this balance in favour of higher

prices as the Commission contends.

116.3 The Commission‟s theory is also misconceived in the light of what I

have said in response to paragraph 26 of the founding affidavit.


117.1 Save to admit that in terms of the supply agreement a higher price is

paid for quantities above 55 000 tons but only up to 100 000 tons per

annum, the allegations in this paragraph are denied.

117.2 As explained more fully above, the increased price for volumes

above 55 000 tons is directly related to the higher cost associated

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with their production, including a higher material price from Sasol

Synfuels, higher purification and operating costs due to the dilute

nature of the relevant condensate stream, and required investment in

new plant and equipment.


118.1 The allegations in this paragraph are vague and are denied.

118.2 I refer to what is stated above regarding the nature and purpose of

the pricing information exchanged between the parties pursuant to

the implementation of the pricing formula in the supply agreement.


Save as stated in clause 5 of the settlement agreement, the allegations in

this paragraph are denied for the reasons set out above.

120 Ad paragraphs 106 to 107

For the reasons set out above, the Commission is not entitled to the relief

sought in these paragraphs.


121.1 As indicated above, SCI has admitted in terms of clause 5 of the

settlement agreement that the propylene pricing formula and related

provisions of the supply agreement, and its implementation, amount

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to the indirect fixing of a price or a trading condition, in

contravention of section 4(1)(b)(i) of the Act.

121.2 The settlement agreement, upon confirmation by the Tribunal, is in

full and final settlement, between the Commission and SCI, of all

proceedings relating to section 4 and section 5(1) of the Act

investigated by the Commission under the Commission‟s case

number 2007Nov3338 (clause 8.1).

W H E R E F O R E I respectfully request that the Commission‟s complaint

referral in respect of the section 8(a) complaints against the first respondent be

dismissed.

_______________________ DEPONENT

I certify that the Deponent has acknowledged that he knows and understands the contents of this declaration. This declaration was sworn to before me and after the Deponent had answered to the prescribed questions and the Deponent‟s signature was placed thereon in my presence at on this day of 2010.

__________________________ COMMISSIONER OF OATHS

109

ANNEXURE A

IN THE COMPETITION TRIBUNAL OF SOUTH AFRICA

CT CASE NO: 48/CR/Aug10

CC CASE NO: 2007Nov3338 In the matter between: THE COMPETITION COMMISSION OF SOUTH AFRICA Applicant and SASOL CHEMICAL INDUSTRIES LIMITED First Respondent SAFRIPOL (PTY) LIMITED Second Respondent _________________________________________________________________

CONFIRMATORY AFFIDAVIT _________________________________________________________________ I, the undersigned,

GRAHAM LESLIE WELLS

do hereby make oath and state that:

1 I am the general manager, planning and technology, of Sasol Polymers,

a division of Sasol Chemical Industries Limited (“SCI”). SCI is the first

110

respondent in this matter. I am duly authorised to represent SCI in

these proceedings, and to depose to this affidavit on its behalf.

2 I have personal knowledge of the facts referred to in the affidavit of

Adriaan Roland janse van Rensburg insofar as they relate to SCI and/or

Sasol Polymers, as the case may be.

3 I have read the affidavit of Adriaan Roland janse van Rensburg and

confirm, in particular, the content of its paragraphs 17 to 21, 24, 47.4,

48.2, 48.3, 51.1, 56, 57.3, 57.7, 64.2, 64.3, 78.1, 81, 87.1, 89.2.3, 99,

100, 107, 110.6 and 113.12 to 113.54.

_______________________ DEPONENT

I certify that the Deponent has acknowledged that he knows and understands the contents of this declaration. This declaration was sworn to before me and after the Deponent had answered to the prescribed questions and the Deponent‟s signature was placed thereon in my presence at on this day of 2010.

__________________________ COMMISSIONER OF OATHS

111

ANNEXURE B

LIST OF ABBREVIATIONS

ABS Acrylonitrile-butadiene-styrene

BOPET Biaxially oriented polyethylene terephthalate

C3= propylene monomer

CAC Competition Appeal Court

CatPoly Oil refinery unit operation in which fuel blend components

are produced

CEIP Customer Export Incentive Policy

CFR Incoterm “Cost and Freight”

CIF Incoterm “Cost, Insurance and Freight”

COD Conversion of Olefins to Diesel Unit

DCF Discounted Cash Flow

DDP Delivered, Duty Paid

DDU Delivered, Duty Unpaid

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DTI Department of Trade and Industry

EPDM Ethylene Propylene Diene Monomer Rubber

EPS Expanded Polystyrene

EVA Ethylene vinyl acetate

FAS Incoterm “Free Alongside Ship”

FAV Fuel Alternative Value

FCA Incoterm “Free Carrier”

FCC Fluidised Catalytic Cracker as used in an oil refinery

FD Fully Delivered

FOB Incoterm “Free on Board”

FRIDGE Fund for Rapid Industrial Growth and Equity

GATT General Agreement on Tariffs and Trade

GDP Gross Domestic Product

GPPS General Purpose Polystyrene

HDPE High Density Polyethylene

HIPS High Impact Polystyrene

IRR Internal Rate of Return

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LDPE Low Density Polyethylene

LLDPE Linear Low Density Polyethylene

mPE Metallocene Polyethylene

NPV Net Present Value

OEM Original Equipment Manufacturer

OICA International Organisation of Motor Vehicle Manufacturers

PA6 Polyamide 6 (nylon)

PA66 Polyamide 66 (nylon)

PBT Polybutylene terephthalate

PC Polycarbonate

PDH Propane Dehydrogenation Unit

PE Polyethylene

PEEK Polyetheretherketone

PET Polyethylene terephthalate

PIB Polyisobutylene

Platformer Oil refinery unit operation for upgrading fuel blend

components

114

PMMA Polymethylmethacrylate (acrylic)

POM Polyoxymethylene (acetal)

PP Polypropylene (generic term for the suite of polymers that

include homopolymer, impact copolymers and random

copolymers)

PPS Polyphenylene sulfide

PPU Propylene Purification Unit

PS Polystyrene

PVC Poly Vinyl Chloride

ROCE Return on Capital Employed

RON Research Octane Number

SAN Styrene-acrylonitrile

SCC Selective Catalytic Cracker

SCI Sasol Chemical Industries

TPE Thermoplastic Elastomer

TPO Thermoplastic Polyolefins

UHMWPE Ultra High Molecular Weight Polyethylene

115

US United States of America

VCM Vinyl Chloride Monomer

WACC Weighted Average Cost of Capital

WE Western Europe

WTO World Trade Organisation

116

ANNEXURE C

respondent's answering affidavit - competition tribunal

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